* Catalan separatist parties seen winning most votes
* Pro-independence flags adorn buildings all over Barcelona
* Newly converted separatist Artur Mas set to be re-elected
* Mas's CiU not seen winning control of regional Parlament
BARCELONA, Spain, Nov 25 (Reuters) - Spain's Catalonia
region, fed up with the tax demands of cash-strapped Madrid, was
expected to elect on Sunday a separatist government that will
try to hold a referendum on independence.
Pro-independence flags, a star against red and yellow
stripes, hung on balconies in Catalonia's capital, Barcelona, as
people cast ballots in a vote that could plunge Spain into a
constitutional crisis even as it struggles to avoid an
international bailout.
An economic crisis and 25 percent unemployment in Spain have
reignited long-dormant separatism in industrial Catalonia, where
people widely believe the tax system run by Madrid has held back
development in a region which has its own financial crisis.
"It's time for Catalans to pursue their own nation. When
you're in a relationship and you're not getting along you work
for mutual respect. We've tried, but Spain hasn't," said Jose
Manuel Victoria, 67, who voted for the main pro-independence
party.
Opinion polls show two-thirds of votes will go to
pro-independence parties that will push for a referendum to
break away from Spain, which the central government will
challenge as unconstitutional.
With more people than Denmark and an economy almost as big
as Portugal's, Catalonia has its own language. Like Basques,
Catalans see themselves as distinct from the rest of Spain.
Growing Catalan separatism is a huge challenge for Prime
Minister Mariano Rajoy, who is trying to bring down painfully
high borrowing costs by persuading investors of Spain's fiscal
and political stability.
Catalan regional President Artur Mas is expected to win
re-election since his conservative Convergence and Union party,
or CiU, is projected to take the most seats in the 135-seat
regional assembly, or Parliament.
But Mas - who converted to separatism after huge street
demonstrations in September - is unlikely to win the 68 seats
needed for an absolute majority.
He will have to team up with smaller pro-independence groups
such as the Republican Left, or ERC, to push ahead with the
plebiscite that he promised to voters.
Up until recently Mas was a moderate nationalist who had
pushed Spain to give Catalonia more self-governing powers. He
has followed the popular mood in converting to a more radical
separatism, but it is not clear he can hold a referendum
legally.
Many Catalans are angry that Rajoy has refused to negotiate
a new tax deal with their largely self-governing region.
Annually, an estimated 16 billion euros ($21 billion) in taxes
paid in Catalonia, about 8 percent of its economic output, is
not returned to the region.
Home to car factories and banks that generate one fifth of
Spain's economic wealth, and birthplace of surrealist painter
Salvador Dali and architect Antoni Gaudi, the region also has
one of the world's most successful football clubs, FC Barcelona.
MONEY PROBLEMS
After a decade of overspending, Catalonia's debt has been
downgraded to junk. Blocked from the bond markets, Mas has had
to seek billions of euros in rescue funds from the central
government in Madrid, itself fighting to prevent financial
meltdown.
But, on the campaign trail, Mas focused on the region's
gripes with Madrid. He told supporters he wanted to be the last
president of Catalonia within Spain.
Wary that separatism could spread to the Basque Country and
beyond, Rajoy said this week that the Catalan election is more
important than general elections.
The recession and a high public deficit have pushed Spain to
the heart of the euro zone debt crisis, and Rajoy is weighing
asking for an international bail-out.
Alicia Sanchez-Camacho, the candidate for Rajoy's People's
Party (PP) in Catalonia, warns of economic disaster if Catalonia
tries to leave Spain. The PP looked set to be the second biggest
party in Parliament with polls forecasting it will win 17 seats.
"Don't stay at home (on election day) if you don't want them
to kick us out of Spain and out of Europe," she said at a
campaign rally this week.
Some 5.2 million Catalans are eligible to vote in the polls,
which opened at 0800 GMT and close at 1900 GMT.
MAS RISK
Enthusiasm for independence could ebb if voters think the
price is having to leave the European Union, leaving Mas high
and dry.
"I have no interest in independence. It's totally
irresponsible," said 45-year-old Luis, a Peruvian immigrant and
salesman who voted for the PP.
"It means exiting the EU and a drop in Gross National
Product... Mas is an economist. He knows this but he isn't
saying it. Why?" said Luis, who declined to give his last name.
After the vote Mas will struggle to push conflicting
agendas: his promised referendum on independence and his drive
to cut Catalonia's high deficit.
While the Republican Left may ally with him to push a
referendum, it may pressure him to give up some spending cuts in
exchange. The PP may support budget cuts but will try to block
the referendum.