By Fiona Ortiz and Raquel Castillo
MADRID (Reuters) - A Spanish court on Wednesday upheld corruption charges against Cristina de Borbon, sister of newly-crowned King Felipe VI, and her husband in one of the last steps before a trial that could cloud the monarchy's bid to rebuild its reputation.
The rulings by the Palma de Mallorca court come barely a week after King Juan Carlos abdicated in favour of his son, who sought to repair the royal family's scandal-worn image with a promise of honesty and transparency when he took the throne.
The court said it had formalized charges of tax fraud and money laundering against Princess Cristina, 49, who was caught up in an investigation of her husband Inaki Urdangarin's business dealings.
Urdangarin, 46, a former Olympic handball player, is accused of using his connections to win public contracts to put on events through his non-profit organization Noos Foundation, and of embezzling several millions of euros in public funds.
The couple, who have four children, are now a few administrative steps away from being put on trial. They have both denied wrongdoing.
Defense attorneys for Cristina de Borbon and Urdangarin told reporters they would appeal Wednesday's ruling, as did the anti-corruption prosecutor of the Balearics, where the investigation is centred. The prosecutor has said repeatedly that he does not believe there is evidence that the princess committed a crime.
Under Spanish law, prosecutors can file briefs on behalf of the defense if they disagree with the examining magistrate who is investigating a case and who has a dual role as prosecutor and judge.
In his 167-page ruling, Palma Examining Magistrate Jose Castro said there was evidence that the couple had paid for dozens of personal items - from parking tickets to children's birthday parties to a trip to Rio de Janeiro - out of a shell company he said was used to launder proceeds from the Noos Foundation.
"Everything indicates that Doña Cristina de Borbon y Grecia was an active participant in organizing and budgeting these events which were clearly of a personal nature," the judge said in the ruling.
He also complained of receiving pressure from many quarters - political, judicial, media and institutional - over the time it took him to investigate Urdangarin. He said it was a complex case and that the four-year investigation was justified.
Princess Cristina and Urdangarin, if found guilty in a trial, could face sentences of multiple years in prison.
The royal family has lost favour after a series of scandals, including the Noos case, as Spaniards battle economic hardship and high unemployment, though Felipe has distanced himself from his sister and remained untouched by the case.
Polls have showed King Juan Carlos' surprise abdication at 76 and his decision to hand over to his 46-year-old son have boosted the monarchy's popularity. Juan Carlos' elephant hunting trip at the height of Spain's financial crisis in 2012 had damaged his standing.
Princess Cristina did not attend last week's coronation, and she and Urdangarin have been barred from official royal events since the investigation gathered pace.
If the ruling is not thrown out on appeal, it could still take months for the case to go to trial. Corruption cases in Spain often take many years to conclude.
Judge Castro charged Urdangarin and one of his main associates, Diego Torres, with breach of legal duty, embezzling public funds, fraud and influence peddling.
The judge said Urdangarin and his partners overcharged local governments for putting on conferences about sports and business, then allegedly hiding the proceeds abroad.
In April 2013, Castro filed preliminary charges against Cristina, saying she had aided and abetted Urdangarin. But a higher court threw out the charges saying the evidence was insufficient.
Castro continued his investigation and came back earlier this year with the stronger charges of tax evasion and money laundering, in a lengthy indictment with copious evidence designed to make the case stronger.
The Clean Hands anti-corruption organization celebrated the judge's ruling on Wednesday.
"This means our institutions are working, that the justice system is independent, that all Spaniards are equal before the law," said Miguel Bernad, head of Clean Hands.
He accused the anti-corruption prosecutor of succumbing to pressure from the palace in his defence of the princess.
Bernad and his organization filed private criminal charges against the princess - using a Spanish legal instrument known as the "people's accusation" - forcing Judge Castro to investigate even though state prosecutors said there was insufficient evidence to pursue a probe.
(Additional reporting by Emma Pinedo, Writing by Sarah White, Editing by Fiona Ortiz and Janet Lawrence)