MADRID--Spain's economy sank deeper into a spiral of price declines in August, compounding worries that countries on the periphery of the euro zone may be entering a period of deflation as they struggle to rebound from recession.

The National Institute of Statistics said Thursday that prices in the euro zone's fourth-largest economy fell by 0.5% on the year in August, the biggest percentage decline since the country experienced a dip in prices in October last year. In July, prices had dropped by 0.3% after a few months of small increases.