By Martin Roberts

MADRID, Sept 23 (Reuters) - Spain has decided to ease proposed sharp cuts in a generous subsidy scheme to solar power producers in one of the world's hottest markets, Energy Secretary Pedro Marin said on Tuesday.

Marin said the proposed limit on total capacity of new solar power panels entitled to subsidies in 2009 will be 500 megawatts, which compares to an earlier draft proposal to set the cap at 300 MW.

"We have approved an additional 200 MW for ground-based installations to soften the change," Marin told reporters after a meeting with solar power lobby group AEF.

That raises to 300 MW the proposed cap on ground-based installations, and leaves the limit on roof-mounted panels entitled to receive subsidies at 200 MW.

Solar panels take up a lot of space, so only ground-based plants can produce power on anything like a utility scale. One recently installed 5 MW plant in Spain covers 40 hectares (99 acres).

Marin said the revised proposals had been submitted to the cabinet, but he was not certain they would be approved at its next meeting on Friday. The current framework expires on Sept. 29.

He could not comment on whether the government had relented on proposed cuts in "feed-in" tariffs designed to gradually make solar panels competitive with conventional generators.

The government has mooted cutting direct subsidies from 0.45 euros ($0.665) per kilowatt-hour to 0.33 euros for roof-mounted panels, and 0.29 for ground-based plants.

Spanish solar industry groups protested when the government first proposed a new cap of 300 MW on subsidised power in July, saying it would force many firms out of business.

Shares in leading international solar power firms also fell on fears of losing a foothold in what is now the world's third biggest market, after Germany and the United States

Marin said a recent survey showed that Spain had 1,500 MW of solar power panels installed, which compares to less than 500 MW at the end of 2007.

Industry groups say that the new cap is still too low, as it will be absorbed by an estimated 300-400 MW of ground-based plants that are already under construction, but will miss the deadline for the current subsidy scheme.

However the government has said it needs to cut back on subsidies as they have allowed the sector to grow too quickly. Industry sources have said quality control has suffered in the race to install new plants before current subsidies expire.

"We want to put the sector in order. Last year has not been very reasonable," Marin said.

The government is also under pressure to cut a burgeoning "tariff deficit" which arises from forcing utilities to sell electricity at below cost. The estimated deficit this year is 4.85 billion euros. (Reporting by Martin Roberts, editing by Anthony Barker)