New battles loom as PM Rajoy sworn in

"I swear to faithfully fulfil the obligations of prime minister and to show loyalty to the king," Rajoy said with his hand on the Spanish constitution, at a ceremony attended by King Felipe VI and broadcast live on national television.

Rajoy, leader of the conservative Popular Party (PP), is set to spend the next three days forming a new cabinet for his hard-won minority government.

A senior party source said he was staying tight-lipped about his cabinet picks, planning to notify ministers of their new jobs "a half-hour before".

The comeback follows a victorious confidence vote in parliament on Saturday -- only possible because Spain's Socialists (PSOE) decided to abstain and not vote against him.

Still it is clear that Rajoy faces unprecedented opposition as Spain grapples with painful economic reforms and resurgent Catalan separatism.

When the PP ruled from 2011 to 2015, it enjoyed an absolute majority in parliament.

Now, it must govern with 137 of 350 MPs, meaning that it will have to negotiate with the upstart centrist Ciudadanos, Basque and Catalan nationalists, and the main opposition Socialists on every bill it seeks to pass.

Rajoy, 61, has been at the helm of a provisional government without full powers for nearly a year following inconclusive elections in December 2015 in which the PP lost its absolute majority, despite coming first.

New elections in June once again failed to produce a clear winner.

Budget headache

Rajoy is expected to name his new cabinet Thursday, with several ministers approaching retirement age set to depart, including Interior Minister Jorge Fernandez Diaz, a controversial figure for his efforts to tighten the legal noose on Catalan separatists.

Rajoy's first daunting task after that will be to submit a budget to parliament for approval after a delay of several months -- certain to be a headache given his lack of a parliamentary majority.

If Rajoy persuades enough MPs to back -- or not oppose -- his taxation and spending plans, he will still face scrutiny from the European Union which will want to know how Spain will reduce its structural deficit to below three percent of GDP for 2017.

But it may prove impossible for Rajoy to secure enough parliamentary support while meeting the terms laid down by Brussels.

To slash the deficit Rajoy will either have to cut spending by 5.5 billion euros ($6 billion) -- angering the left on whose support he may depend to get the budget passed -- or hike taxes, which could in term anger businesses and jeopardise investment.

Spain has the second highest unemployment rate in the EU -- second only to Greece -- at 18.9 percent, which coupled with a pensions crisis threatens fragile growth.

Alongside the economy, Rajoy will be forced to grasp the thorny issue of Catalonia, Spain's wealthy northeastern region where an independence movement has gathered pace since he first came to power in 2011.

Catalan regional president Carles Puigdemont has vowed to press ahead with an independence referendum next year if Madrid refuses to negotiate.