Zapatero has won popularity with liberals around Europe over the last four years by pushing through social policies such as legalising gay marriage. But his next term will pitted with more serious problems as Spain's economic boom comes to a sudden end.
In the last nine months, 300,000 people have joined the jobless queues, most of them from the construction sector.
Several analysts have cut their 2008 growth forecasts to about 2 percent after 3.8 percent growth last year and some worry that things could get worse if property companies start defaulting on their huge piles of debt.
SMALL PARTY POWER
How quickly and firmly Zapatero can deal with the slowdown will depend on what alliances he strikes with smaller parties, which often demand regional policies that rile the rest of Spain in exchange for their support.
Political analysts expected the Socialists to do a deal with the Catalan party Convergencia i Unio (CiU), which has sided with Zapatero's minority government in many votes over the last four years. CiU was projected to win 10 seats on Sunday.
"What I expect now is an emergency fiscal package which is probably going to be announced very soon," said Gilles Moec, an economist at Bank of America.
"Of course, the fact that the Socialists are not apparently going to have an absolute majority probably makes it a little bit complicated."
Nicolas Lopez, an analyst at Spanish brokerage M&G, said the election result was not a surprise and that the stock market would now look to see what steps the new government would take to mitigate the economic slowdown, and when.
"I imagine the emergency plan will be to assign a part of the budget surplus to reinvigorate the construction sector and invest in infrastructure to offset the fall in residential construction," he said.
