Spain was poised on the brink of a renewed wave of political violence last night after a Basque politician, kidnapped by Eta separatists, was found shot in the head just hours after half a million demonstrators had thronged the streets of the northern city of Bilbao to demand his release.

Last night, unknown attackers firebombed the seat of Eta's political wing in the northern Basque town of Ermua, near Bilbao. There were no casualties.

There had been an outbreak of weeping and shouts of "assassins!" in Ermua when it was announced that Miguel Angel Blanco, 29, a local councillor for the conservative Popular Party, had been found dead in woods in Lasarte, near San Sebastian, with gunshot wounds to his head and his hands tied.

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Bilbao hospital later reported that Mr Blanco was still breathing, but in a coma, and that he had two bullets in his brain. Surgeons decided not to remove the slugs. A hospital spokesman said Mr Blanco was in an "extremely grave condition". One doctor said he had suffered irreversible brain damage.

In Pamplona, the traditional bull-run was suspended in a show of solidarity for Mr Blanco.

Eta had threatened to kill Mr Blanco by 4pm yesterday unless Madrid met its demand to transfer 450 Eta prisoners to jails in the Basque Country. The government said it would not give in.

Bearing anti-Eta blue ribbons, applauding and crying "Libertad! Libertad!", ("Freedom!"), the demonstrators, led by the Conservative Prime Minister, Jose Mari Aznar, and leaders of the Basque Nationalist regional government and opposition Socialists, filled the streets in the biggest such demonstration the region has seen for years. The regional interior minister, Juan Maria Atutxa, hailed the demonstration as "the voice of the vast majority" but warned: "Eta always carries out its threats."

Security forces had worked flat out to find Mr Blanco before the deadline expired. It was the third time Eta had set a deadline to kill a hostage. In the previous cases, both were eventually killed.

Less than a fortnight ago, a prison officer, Jose Antonio Ortega Lara, was freed by the Civil Guard after being held hostage by Eta in an underground cell for 18 months. The conditions endured by Mr Ortega Lara, who looked like a concentration camp victim when he emerged, shocked the nation.

In Bilbao, hundreds of thousands thronged the streets, and approach roads were blocked by traffic jams. Sylvia, a Basque woman of 60, said: "These terrorists make me feel ashamed of my country."