* Primark's 2nd biggest flagship debuts in central Madrid
* Store housed in iconic building owned by rival Inditex's founder
* Primark growth has mainly harmed smaller retailers
* Bargain clothes successful in cash-strapped Spain
By Elisabeth O'Leary
MADRID, Oct 15 (Reuters) - Primark opened a glitzy new flagship store in Madrid on Thursday, squarely planting the budget fashion retailer in the Spanish backyard of Zara-owner Inditex.
By opening its second-biggest store in the world in Spain, Primark, owned by Associated British Foods, signalled its confidence in its future in Spain after 10 years of quietly building up a chain of around 40 stores there.
There was not much quiet about the debut, however, as the new store was mobbed by hundreds of shoppers eager to grab fashion essentials at bargain prices in a country where 22 percent unemployment has strained family finances.
"Being on Gran Via and in such a large space is obviously a symbolic step for Primark. It's the icing on the cake for the new king of low-cost clothing retailing in Spain," said Carlos Hernandez, a Madrid-based retail consultant.
The new store is in the Gran Via 32 building on one of Madrid's main arteries which now has a more swanky look thanks to years of renovation work on the once-delapidated 1920s and 30s multi-storey buildings that line the street.
The building also houses Primark's nearest rivals -- Mango, Hennes & Mauritz and Inditex's Lefties and, ironically, is owned by Inditex's founder, Amancio Ortega, the world's fourth richest man.
Around 300 people queued outside the store, with dancers wearing black "I love Primark" T-shirts and carrying balloons to entertain customers.
The building features a glass-domed patio lined with balconies, featuring laser screens promoting the store's offers: dozens of styles of bags and brimmed hats, 11-euro stilettos and 28-euro camel coats.
In the shop was Victor, a 25-year-old who studied design but is unemployed, wearing a black T-shirt with a Palestinian scarf wound tightly about his neck.
"I've come for the hype really. Primark do trends very well and their logoed T-shirts are great, though the quality of their stuff isn't great. But it's cheap," he said.
"Primark was popular even before (Spain's economic) crisis, because there isn't anywhere you can find jeans for 9 euros," he said, shouting to be heard above the in-store DJ's set.
In Spain, only just beginning to emerge from a deep recession, cheap mass-market retailers are seen as appealing to price-conscious shoppers.
Cheap oil, weak inflation, tax cuts and low interest rates are all helping to put some money in consumers' pockets, and retail sales are recovering. But the outlook remains tough for many.
"This is a good moment to expand again, particularly in the low-cost segment, as salaries are and will continue to be low in the years ahead and growth will come particularly from these low and low-to-mid retail segments," said Hernandez.
Demand for cheaper fashion has also put some pressure on Inditex, which owns the Zara, Bershka and Massimo Dutti store chains and has overhauled Lefties, its discount arm which it says sells leftover Zara stock although the clothes are branded under the Lefties name.
But largely speaking, estimates Bernstein analyst Jamie Merriman, Primark's around 6 percent Spanish market share has hit smaller players more than Inditex.
"Spain is very interesting given that it is Inditex's home turf, but so far there has been room for both retailers and we're seeing continued consolidation. There is a surprising number of small retailers that are losing out," she said.
"This opening reflects the boom in mass-market fashion, with Primark, Inditex, Mango and H&M all doing very well in Spain ... Why? Because tourism is doing very well," said Robert Travers, a retail property partner at Cushman & Wakefield.
Showing signs of a recovery, Spanish consumer confidence has shot up 17 percentage points in a year, according to state pollster CIS, with the tourist industry also doing well thanks to a weak euro and security concerns elsewhere. (Editing by Greg Mahlich and Adrian Croft)