Spain's government said on Thursday it had struck a deal with unions to delay retirement for most workers, a victory for Socialist Prime Minister Jose Luis Rodriguez Zapatero in his campaign to cut the state deficit.

Union leaders said there were still details to iron out before they would sign the pact but the Labor Ministry said in a statement that there was an agreement in principle.

With or without union backing, Zapatero will raise the retirement age to 67, one of the highest in Europe, and become the latest European country to tackle pension reform as ageing populations and lower birth rates strain Social Security systems.

The reform will not have a fiscal impact before 2015 but is considered key to showing investors the government is serious about structural change to revive its fragile economy and avoid a bailout like those in Ireland and Greece.

"We need to see whether the pension reform convinces the markets that it goes far enough. It is not as urgent as other reforms, but still is important for market credibility," said an economist in Madrid, who asked not to be named.

Pensions could account for 14 percent of Spain's public expenditure by 2040-2050, compared to about 9 percent in 2010, according to economy ministry data. Last year was the first that Spain's pension system did not run a surplus.

French President Nicolas Sarkozy enacted pension reform in November, raising the retirement age to 62, despite opposition and labor protests.

A deal between the government and organized labor on pensions could pave the way for unions to agree to other reforms, such as making collective bargaining less rigid. The two big union umbrella groups, UGT and CCOO, both are expected to enter the pact.

"It's safe, balanced, ambitious and can be trusted," a spokesman at the Moncloa government palace said of the pact.

The main concession the unions won after months of negotiations was that workers who have paid into the pension system for 38.5 years will be allowed to retire at age 65. The government and unions had been in agreement on most other details of the reform.

The new retirement age begins to go into effect little by little, beginning in 2013, sources close to the deal said.

Zapatero's Cabinet is set to approve the pension reform bill on Friday and from there it goes to Parliament, where union backing would likely give it a smooth ride.

However, even if the bill does not get a thumbs up from lawmakers, Zapatero plans to enact pension changes by decree, arguing they are essential to Spain's credibility as it faces down market attacks on its sovereign debt.

Zapatero last year pushed through a labor reform without union backing and without votes from the main opposition party. Now he is trying to make it stronger.

Labor and pensions reform are among a raft of measures by Zapatero to reassure investors that Spain is not at the brink of a fiscal crisis that would trigger a European Union-backed bailout.

Other measures include spending cuts, lower public sector wages, higher sales and tobacco taxes, the sale of state assets and a savings banks rescue.
Unions had threatened to call a general strike over pension reform, but under the pact that would be called off. A strike on Sept. 29 hit industries and transport but had little impact on other sectors.

"The unions have actively sought a pact with the government on pensions because they really did not want to risk another unsuccessful strike," the economist said.