The European Commission predicts Portuguese GDP to shrink 3 percent in 2012 and 1 percent in 2013 while unemployment is set to hit a record high of 16.4 percent in 2013 after 15.5 percent at the end of this year, according to its autum economic forecast available here on Wednesday.

The EU said that Spain and the impact of a huge tax hike on internal demand could put Portugal's public deficit target at risk. However, it still expects the country to meet the recently redefined budget deficit targets of 5 percent and 4.5 percent in 2012 and 2013 respectively.

"Continued tensions in the euro area and particularly in neighbouring Spain have the potential to spill over to Portugal through the trade, financial market or confidence channels. There is also a heightened risk of adverse macro-fiscal feedback loops, as the composition of the fiscal adjustment has moved strongly towards the revenue side,"the EU said.

Portugal agreed last year to a 78 billion euro(99.84 billion dollars) bailout plan set by the Troika -- the European Commission,the International Monetary Fund and the European Central Bank and the country must reduce its budget deficit to 5 percent instead of the previous 4.5 percent of its gross domestic product this year.

A draft budget, which was approved by the parliament last month but still needs a final approval, provided a raft of austeriy measures highlighting drastic tax hikes and sparked widespread protests across the country. Endi