Police in Spain have foiled a plot by the Basque separatist group Eta to mount a massive bombing campaign in Madrid on New Year's Eve, the government said yesterday.

The announcement followed the detention of two Eta suspects after a gun battle with police on Tuesday. The detainees were carrying 130 kilos of explosives which they planned to detonate in five department stores in the Spanish capital on 31 December, the Interior Minister, Angel Acebes, said. "They intended to create a lot of pain, terror and suffering with a large-scale operation," he said.

Two paramilitary Civil Guards stopped the men's car as it approached Madrid after they noticed the number plates were too old for the model of the car. One officer, Antonio Molina, was shot dead, and another was wounded. One Eta suspect, Gotzon Aranburu Sudupe, was wounded and taken to hospital. The other, Jose Maria Exteberria, was detained in San Sebastian after he hijacked a car and subsequently took a bus. He confessed to the bomb plot under questioning, Mr Acebes said.

Spanish police travelled to Italy yesterday after Italian travel agents received leaflets signed by Eta written in Basque, French, English and Spanish, warning of New Year terror attacks. "All Spanish tourist infrastructures, plus military, police and economic establishments will be the target of our armed actions," the leaflets warned. They urged recipients to inform their clients of the "risks if they choose to visit Spain in 2003".

French police detained two suspected Eta leaders, Ibon Fernandez Iradi and Ainhoa Garcia Montera, near Bayonne yesterday.