By Fiona Ortiz and Elisabeth O'Leary
MADRID (Reuters) - Spain's rising political star is a 61-year-old former Socialist whose message of changing the system from within is drawing voters in despair at economic ruin and official corruption in the euro zone's fourth biggest economy.
Lacking the raucous anti-establishment appeal of Italy's Beppe Grillo and Greek leftist hero Alexis Tsipras, Rosa Diez relies on sharp debate to deliver her reform message to a country pushed to the brink by the euro zone debt crisis.
Diez split from the Socialist party six years ago and formed the centrist Union for Democracy and Progress, or UPyD.
Polls show she is Spain's most highly regarded politician at a time when a quarter of workers are out of a job and public disenchantment with the political class is rising, as is the caseload of judges investigating allegations of official graft.
Projections by Metroscopia polling firm show that if elections were held now, Diez's party could take as many as 30 seats in the 350 seat parliament, up from five at present.
The former Communists the United Left could quadruple its presence to 48 seats, perhaps forcing one of Spain's two main political forces, the socialists or the center-right People's Party, to form a coalition government for the first time.
Although the bigger parties will expect to win back support during campaigning for the 2015 vote, the growing impact of smaller parties is bringing about a dramatic and permanent change in the political landscape.
"The two-party system has suffocated democracy and people know that. A huge majority of Spanish citizens want a radical change in the political system," Diez said in an interview with Reuters.
She cultivates a maverick image - an asymmetrical haircut and each fingernail painted a different color - but her politics are far from revolutionary. She defines herself as a social-liberal who endorses free-market economics, progressive individual liberties and a social safety net.
When Spain returned to democracy in the 1970s after Francisco Franco's dictatorship, the electoral system was set up to guarantee stability by limiting proportionality and favoring two major parties.
Over the past 36 years the People's Party - which currently has an absolute majority in parliament - and the Socialists carved up power and controlled everything from savings banks to the justice system. To pass laws they counted on votes from nationalist parties from the wealthy Basque and Catalan regions, which received extensive self-governing powers in return.
The challenge to that long-running status quo in Spain reflects political upheaval all over Europe, where populists and extremists have tapped into public rejection of austerity measures, immigration, recession and unemployment.
In Britain, a far-right campaign to leave the European Union has gained ground; comedian-turned-activist Grillo has became a major force in Italy; and in Greece radical leftists and ultra-nationalists are growing in influence.
The economic picture in Spain is among the bleakest after a construction boom turned to bust, draining the banks and pushing up corporate insolvencies. Unemployment is around 27 percent. Madrid sought 42 billion euros in international assistance last year to put the financial system on an even keel.
But while the rise of smaller parties has meant destabilizing fragmentation and shaky coalitions in countries such as Italy and Greece, in Spain the recent shadow of fascism means there is little appetite for extremism.
Here, the increased weight of alternative voices could be a sign of maturing democracy, some observers say.
"It's going to be very difficult for the two big parties to recover legitimacy. Governing will be more difficult in the future but I'm skeptical of an Italian scenario. Spaniards are wary of extremism," said Antonio Barroso, a London-based political analyst at Teneo Intelligence, an advisory firm.
Diez's father was imprisoned for his political beliefs under Franco and she says she was "nursed on politics."
After Franco died and Spain finally held elections - in 1977 - Diez said "it was only logical" for her to run for office. She has been in politics ever since.
Still, she has managed to paint herself as an outsider and draw support from both the left and the right for her pro-European views and centrist line.
"I voted for her because she's very charismatic. She's daring and different and I thought she would break barriers and do different things. I was totally disappointed with the two main parties," said Jose Miguel Delgado, 47, an industrial technician.
Diez has tapped into public outrage over the costly bailout for banks that loaned recklessly during the real-estate boom.
"She has a great nose for social change and is able to convert that into party ideology," says a political rival who has worked with her in parliament for many years.
Diez's party has brought a lawsuit against former board members of Bankia, a major Spanish bank that almost collapsed last year and received the biggest bailout in the country's history.
The rescue came just as the government was cutting spending on hospitals and schools and rising numbers of Spaniards were out of work, defaulting on their mortgages and losing their homes.
The People's Party (PP) has seen its support dwindle to some 29 percent from 45 percent in the last elections as Prime Minister Mariano Rajoy takes unpopular economic measures. His credibility was also damaged by allegations that high-level executives in his party channeled cash donations from business leaders to party leaders. A judge is investigating the charges.
Spaniards are turning not only to alternative political leaders like Diez and Cayo Lara - the 61-year-old head of the radical United Left, who has harvested votes from disillusioned Socialists.
They are also increasingly involved with social movements.
A new hero to many is Ada Colau, 39, leader of an activist group called the Mortgage Victims Platform that helps jobless mortgage defaulters fight the banks. Last year 39,000 families left their homes because of mortgage problems. Of those almost 3,000 were forcibly evicted.
Barcelona-based Colau, frequently seen on television at protests outside banks, says a sign of the impact her group has had is that a director at one of Spain's biggest banks consulted with the Platform on an affordable housing proposal.
The Platform has an approval rating of 71 percent, according to a recent opinion poll, while politicians in general are the very lowest rated institution in all of Spain, with a disapproval rating of 93 percent.
The influence of the Platform has alarmed the PP government.
PP Secretary General Maria Dolores de Cospedal accused the Platform of demagoguery and said they should legitimize themselves by forming a political party, an idea Colau rejects.
"People stop me on the street and ask me to run for office," Colau told Reuters. "But if I did, the only thing I'd be able to do every now and again would be to have a tantrum in Parliament. I'd have much less influence than I have now."
Diez, meanwhile, enjoys a high profile due to her weekly show-downs with the prime minister in televised parliamentary debates. Spaniards gave Diez a grade of 3.96 in a survey this month by Metroscopia. Premier Rajoy got a grade of 2.44, while Socialist leader Alfredo Perez Rubalcaba got a 3.00, and no politician beat Diez.
While she's well-regarded now, she may find it hard to maintain a simultaneous role as rebel and political operator.
Critics say Diez's rise will be limited by her focus on returning powers to the central government that have been ceded to regional governments in Catalonia and Basque Country, and by a lack of detail in her economic policy.
Diez rejects the criticism, pointing to her initiatives to shut down public companies and unnecessary institutions, simplify employment contracts to make hiring and firing cheaper for corporations, and standardize business rules across Spain.
She does acknowledge it will be difficult for her party to break into the big time unless Spain reforms election laws that make it hard for minority parties to get representation anywhere except the largest cities, Madrid and Barcelona.
Experts are skeptical there is any political will to overhaul the electoral system and destroy the PP and Socialist power bases in local governments around the country.
"If you have a society in which most people are benefiting from protectionism or favors from the political system, it's very difficult to see how that same system is going to remove those," said Dr. Jonathan Hopkin, a politics expert at the London School of Economics.
One arena where the UPyD and the United Left can both shine is in European Parliamentary elections next year, where they are expected to gain significant numbers of seats because that vote is run on a strictly proportional basis.
(Editing by Janet McBride)