Ratings agency Moody's has cut the ratings of 16 Spanish banks by between one and three notches.

The agency cited "renewed recession, the ongoing real-estate crisis and persistent high levels of unemployment".

It also blamed the reduced creditworthiness of the government.

The move came just over a week after the government intervened to prop up the fourth largest bank Bankia by taking a 45 percent stake.

Top bank Santander and number two BBVA were both hit with three-notch downgrades to A3, while two other large banks Banesto and CaixaBank, were also cut to the same level.

Bankia on Thursday had to bat away rumours it had been hit with a run on deposits, as nervousness around the euro zone grew over the entire Spanish banking sector.

The Spanish government paid higher rates to place three and four-year bonds with wary investors yesterday, while Bankia was reportedly hit by heavy withdrawals by clients.

Earlier yesterday, Moody's downgraded the credit of four Spanish regional authorities, warning they would likely miss their deficit-reduction targets.

Greece downgrade adds to euro uncertainty


Greece was also downgraded on fears it could exit the euro zone.

Asian markets tumbled this morning and the euro faced more pressure as traders shifted out of riskier assets in the expectation that another Greek election next month will be won by anti-austerity parties

European leaders moved to resolve an emerging split over how to deal with the issue while the White House said it will raise "specific" actions to be taken at a G8 summit that starts Friday.

A caretaker government took office in Athens on Thursday to organise its second election in six weeks after an inconclusive May 6 vote as fears over its possible euro exit led to concerns of contagion in Spain and Italy.

While the Greek polls saw 70% of the electorate vote against pro-austerity parties there was no overall winner, leaving the country in limbo.

And there are fears the new vote next month offers no guarantee of a viable government able to implement an EU-IMF bailout that has divided the country.

Fitch downgraded Greece's credit a notch, to CCC from B-, saying it was vulnerable to default amid political uncertainty over Athens' commitment to the crucial bailout plan.

"The downgrade of Greece's sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU)," it said in a statement.

The International Monetary Fund said Thursday it would hold off on official contacts with Greece until after the June 17 elections, warning no new funds will be released from the €240 billion bailout if progress on pledged reforms and tough austerity measures falters.

In a videoconference held late Thursday the leaders of Britain, Germany, France, Italy and senior EU officials sought to address an emerging split that threatened to paralyse European policymaking.

"There was a high degree of agreement that fiscal consolidation and growth are not mutually exclusive but that both are needed," a spokesman for German Chancellor Angela Merkel said in an email.

New French President Francois Hollande was elected on a promise to negotiate the new EU fiscal pact to include growth measures, with Finance Minister Pierre Moscovici warning Thursday France would not ratify the treaty unless the issue is addressed.

Merkel, the leading proponent of the fiscal pact, has said cutting budget deficits is a necessary precondition for long-term growth.

British Prime Minister David Cameron had earlier called for euro zone leaders to take decisive action or face the break up of the single currency.

President Barack Obama will raise "specific" actions Europe could take on the at the G8 summit in Maryland from Friday.

"The United States welcomes the evolving discussion and debate in Europe about the imperative for jobs and growth," Obama's national security adviser Tom Donilon said.

"The United States has an extraordinarily significant stake in the outcome of the economic discussions in Europe and the steps that are taken in Europe."

Asian markets were lower in early trade because of the turmoil. Tokyo tumbled 2.34% by the break, Hong Kong fell 2.13%, Sydney shed 1.99%, Seoul dived 2.54% and Shanghai was 0.96% off.

And on currency markets the euro bought $1.2671, compared with $1.2693 late Thursday in New York, while it was also at 100.62 yen from 100.65 yen.

Fears over the future of the 17-nation bloc were underscored in Madrid, where the national statistics institute INE said the country's economy shrunk 0.3% in the January-March first quarter of 2012.

That was the same decline seen in the last three months of 2011 and confirmed that Spain was officially in recession, defined as two straight quarters of economic contraction.

Italy is also in recession, while France only narrowly escaped a similar fate.