Have a look on the http://www.vodfone.es website for 'Bono'. I bought one of their PAYG sim cards in 2006 for €24 which already had €24 of credit on it. I didn't need to register it at the time and it worked straight out of the pack, but I did have to register it last year as it would have stopped working if I didn't do it.

I go for their cheapest 'Bono' which costs €19 and gets me 200Mb of data. €39 buys 1Gb of data.

Thanks A.M. Is the registration process straightforward? My Spanish is fairly non-existant!!

You can buy them almost anywhere in Spain at newsagents, market stalls, petrol stations, etc. I would find a Vodafone shop if I were you so that the staff there can register it for you.

There is a guy on eBay who sells them. He lives in Madrid and will pre-register one for you and post it to your UK address. It costs more this way but at least you know it's ready to go and you can also give your friends & relatives the Spanish phone number before you leave the UK. This saves a fortune as in-coming calls are free!

I´ve recently tried to buy a PAYG SIM for my parents for when they come out here to visit but Movistar have stopped selling them and i presume other phone companies will follow suit.
Now they will sell you the phone, with SIM and 12 euros of credit for a total price of 20 euros. Absolute bargain, although the phone will probably die after 6 months use.

That seems a bit odd since new companies are joining the mobile phone market almost on a weekly basis. MASmovil and Lebara are a couple of latest ones offering pay-as-you-go sim packs.

I've been looking at MASmovil and it seems quite good. They've a 15€ for 1GB for dongles tariff and a 300MB for 5€ for mobiles rate. Even their 5c per meg on PAYG is a lot better than roaming rates.