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Spanish Socialist heavyweight Diaz to run in divisive primaries

By Inmaculada Sanz

MADRID (Reuters) - An influential regional leader in Spain's Socialist party, Susana Diaz, threw her hat in the ring on Sunday to lead the center-left force before a primary that could hold the key for the country's political stability.

Diaz, seen as more amenable to striking deals with the government, will face a more leftist rival, Pedro Sanchez, who tried to block Rajoy's return to power last year when he was leader of the Socialists.

The Socialist party suffered an electoral rout last June but has enough seats in parliament to make life difficult for conservative Prime Minister Mariano Rajoy's minority government and will play a key role in passing or blocking reforms.

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The outcome of the Socialist primary in May could determine whether Rajoy will be able to see out his four year term as he tries to gain backing from the opposition. He has yet to pass a budget for 2017, for instance.

Sanchez was ousted by the party in October after 10 months of political stalemate, paving the way for Rajoy to be re-instated for a second term when the Socialists abstained in a parliamentary vote. The Socialists, known as PSOE, have been under interim management since.

Diaz, the 42-year-old daughter of a plumber, heads up the Socialist stronghold of Andalusia and has the backing of most of the party's leaders.

"Spain needs us ... I want this party to win again," she told a gathering of several thousand supporters in Madrid that included two former Socialist prime ministers, Felipe Gonzalez and Jose Luis Rodriguez Zapatero.

The 138-year-old party came second behind Rajoy's People's Party in a June 2016 election but its score was its worst ever, as the rise of newer forces ended four decades of a stable two-party system.

Socialist insiders describe Diaz as a pragmatist who will not support Rajoy's policies but who is known for reaching compromises.

"It's one thing to forge pacts and another to give yourself over to someone else," Diaz told the rally, as she defended her vision for an "autonomous" Socialist party.

Detractors see her as too close to the Socialist old-guard at a time when far-left Podemos ("We Can") has won over millions of voters with an anti-establishment message.

Sanchez, 44, has strong support among the Socialist party's grassroots.

"The future cannot be led by whoever is still stuck in the past," he told a separate event in Valencia on Sunday.

Former parliamentary leader Patxi Lopez is also running in the Socialist primaries but is seen as an outside candidate.

(This version of the story has been refiled to fix typo)

(Writing by Sarah White; Editing by Tom Heneghan)