My experience (admittedly 12 years ago now) is that very, very few hostels in Europe allow sleeping bags because of the bedbug issue. You take a cotton or synthetic sleep sack (either a sleeping bag liner or a regular bed sheet sewn into a bag) and a pillowcase and use the hostel's blankets. A few hostels even insisted I use their bed linen rather than mine. Extra charge, of course.

I suggest you do some research before investing in a sleeping bag specifially for hostel use. Unless conditions have changed, it will be useless in most places. You'll get lots more up-to-date info on budget travel sites such as Lonely Planet (although LP ain't what it used to be).

Take a look at Campmor.com for inexpensive gear, although the REI bag you mentioned looks like a good deal--if you can be sure the hostels will allow it.

Have a great time in Spain; it's a beautiful country! If you're going at any time within a few weeks of Easter, be sure to make reservations well in advance. Now is not too late! I was there during Holy Week and it appeared that the entire population of northern Europe was there enjoying the sun! Also, expect many places to be closed down Good Friday (or even Maundy Thursday) through Easter Monday.