Spain's borrowing costs have leapt to a euro-era record after Moody's downgraded its debt close to junk-bond status and warned of a rising risk of a full-blown bailout.
A weekend deal for eurozone powers to extend a bailout loan of up to 100 billion euros ($A128 billion) to salvage Spain's stricken banks failed to stop an intensifying storm on the debt market.
Instead, the size of the rescue loan fed fears about its impact on Spain's mushrooming sovereign debt and prompted concerns that the state may eventually need rescuing itself.
The Spanish crisis is unfolding against the background of Sunday's Greek elections, further destabilising markets that fear a victory by anti-austerity parties could send Athens back to the drachma.
"We are living in a period of volatility, a tense situation," Economy Minister Luis de Guindos told reporters after meeting with Prime Minister Mariano Rajoy and other top policymakers on Thursday.
"This week is a difficult week before the Greek elections and obviously the government is aware of the situation," the economy chief said.
"But in these circumstances the government wants to send a message of calm, a message that we know absolutely that we have the support of all our partners," he said.
The interest rate on Spanish 10-year government bonds soared to 6.9650 per cent, the highest since the birth of the single currency in 1999, from 6.721 per cent the previous evening.
The risk premium - the difference in the rate between Spanish and safe-haven German 10-year bonds - breached 5.50 percentage points, another euro-era record.
Such high interest rates are regarded by many analysts as impossible for the nation to afford to finance its activities over the longer term, raising the risk of a bigger bailout, just as was the case for Greece, Ireland and neighbour Portugal.
Moody Investors Service slashed Spain's sovereign debt rating by three notches late on Wednesday to Baa3 and left it on review for a possible further downgrade.
It predicted Spain's public debt, which amounted to 68.5 per cent of economic output at the end of 2011, would bulge to 90 per cent this year and carry on rising until the middle of the decade.
At such high borrowing rates Madrid had limited access to the markets, and was increasingly dependent on commercial banks, flush with cheap loans provided the European Central Bank, to buy its government bonds, the agency said.