By Jason Webb

MADRID, March 7 (Reuters) - Spain's main political parties cancelled closing campaign rallies on Friday, two days before an election, after a former councillor from the governing Socialist Party was shot and killed in the Basque Country.

Isaias Carrasco, a father of three, was shot in front of his wife and young daughter in the small town of Mondragon at about 1.30 p.m. (1230 GMT), police, Socialist officials and witnesses said.

"I looked out of the window and I saw his wife and daughter on top of him shouting 'murderers, murderers'. His chest was covered with blood and they had got blood on them too," a local woman told television network CNN+.

There was no immediate claim of responsibility but Basque separatist rebels have often targeted town councillors and carried out hit and run shootings.

Socialist Prime Minister Jose Luis Rodriguez Zapatero, who broke off peace talks with the Basque separatist group ETA in December 2006, leads the conservative opposition Popular Party in opinion polls.

Zapatero became prime minister as a result of a surprise election victory following another terror attack in 2004, when Islamist extremists killed 191 people by bombing Madrid trains.

The effect of Friday's killing on Zapatero's chances on Sunday was not immediately clear. He has led a crackdown on ETA, but the Popular Party has accused him of being soft on the Basque separatists in the past.

"It might mean more people get out and vote on Sunday," said Julian Santamaria, a politics professor at Madrid's Complutense University, but he said he did not think the killing would alter voting intentions.

Both the Socialist Party and the Popular Party said they would cancel rallies scheduled for Friday, the last day campaigning is allowed. (Additional reporting by Ben Harding, Teresa Larraz, Sonya Dowsett, Jane Barrett, Elisabeth O'Leary, Raquel Castillo, Inmaculada Sanz and Arantza Goyoaga in Bilbao) (editing by Tim Pearce)

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