To drive a foreign registered car in Spain you must have with you, your passport, current driving licence, valid insurance and vehicle registration document. Vehicles should display a national identity plate (GB/USA etc), two red warning triangles and a set of spare bulbs.

A few hints
Sadly, the situation in Spain, although has been getting better, is not the same than in most of the European countries; at all times expect the unexpected. Cars may indicate right and turn left, cars will stop in the middle of the road without warning and dogs, children and old ladies will constantly challenge your right to the road. Watch out for traffic lights, they are often 20 feet in the air and hard to see in the sun. Watch out for pedestrian crossings - especially if you are the pedestrian, unfortunately they don't mean much other than to decorate the road. On dual carriageways, cars may overtake on whichever side they feel like and some cars may not show lights when it's dark.

A few basic rules
Give way to traffic from the right, especially at roundabouts. Do not pull into the middle of the road to turn left if there is a solid line in the road. There are often special lanes for this, signposted cambio de sentido. Always wear seatbelts and don't drink and drive - the limits are very low and the penalties very high, as are on-the-spot fines for traffic offences, which can also lead you to jail.

More about Drunk-driving offense
Spain is no exception as far as drunk driving is concerned. The consequences of driving a motor vehicle under the effects of alcohol are severe and comparable to other EU countries, whose legislation may vary in the limit over which driving is an offence or the length of driving licence suspension and imprisonment terms. In Spain, a normal penalty for driving with excess of alcohol includes a statutory minimum period of 12 months driving licence suspension and a fine or weekend arrest. You do not need to have commited a moving traffic offence.

Parking
As a general rule you may not park in Spain where the pavement is painted yellow or where a no parking sign is displayed. In major cities, non-metered on-street parking is difficult to find but there are parking spaces marked in blue, for which you should purchase a ticket from a machine or an attendant. These spaces are usually for two hours maximum. Penalties for parking infringements vary from town to town and can be heavy.

Fines
Fines imposed for speeding are calculated at 1000 pts per kilometre over the speed limit and are payable on the spot. Speed traps are becoming quite frequent. Fines for other offences are calculated on the severity of the offence and on the whim of the police officer. All are payable on the spot. The legal drink-drive limit is currently 50mg per millilitre and breathaliser tests are frequent all over Spain, specially in Marbella! Fines are very high. You can also face a fine if you do not carry with you, a red warning triangle, spare bulbs and a first aid kit. You should also have with you, your current insurance, vehicle registration form and a valid driving licence. You should also be able to produce a passport or ID card.

Seatbelts
It is compulsory on all roads to wear seatbelts both front and rear when fitted.

Autopista (toll) roads
Spain has over 2,000km of toll roads and more are planned. They are of excellent standard and all have service stations every 40km or so. The tolls are expensive and are usually calculated per km. Some toll roads, for long distance travelling allow you to collect a ticket at the start and then pay the total when you exit the road. For short distances you will pay the toll as you exit the toll road. As you approach the peaje (toll booth), you will be confronted with several lanes. The telepago lane is for cars fitted with a special chip on the windscreen. Automatico is for paying by credit card or the exact change and the manual has an attendant who collects your fee. All useable lanes will have a green arrow, un-usable lanes display a red cross.

Road tax and vehicle inspections
There is a charge for road tax in Spain and this is payable to the local government. The fee is related to the individual vehicle and the area. All vehicles are required to undertake an annual inspection called an ITV, to verify the condition of the vehicle. Most major towns and cities have several ITV stations to which you can take your car, so this is not an issue to worry about.

Licenses

An EU driver's license is valid in Spain, and vice-versa. Depending on the country, non-EU driver's licenses may be valid for the first year after arrival in Spain. After that, you are officially required to have a Spanish license. Beware, getting a Spanish driver's license can be expensive.

USA: Because each state has its own rules, foreign countries make agreements with individual states! That means that your New York driver's license is valid (for the first year) in Spain, but your Massachusetts driver's license is not (whether the police know which states are valid is another question).

DIRECCION GENERAL DE TRAFICO [English/Spanish] (Spain's Traffic Agency) Includes sections on licenses, permits, vehicle registration, how to obtain documents, etc.