Spain's economy minister says the government will pump at least €9 billion of public money into nationalized lender Bankia.
This will allow it to meet new capital requirements. Bankia has €32 billion in toxic assets.
The government is seeking to shore up Spain's banking sector against market fears about the country's financial health.
Many Spanish lenders are heavily exposed to Spain's burst real estate bubble.
Economy Minister Luis de Guindos told lawmakers today the government is ready to provide further financial support when Bankia comes up with a recovery plan.
Losses at Bankia, Spain's fourth largest bank, are central to investor fears that the fragile financial system could become more vulnerable as default rates rise in a recession.
Economy Minister Luis de Guindos told a congressional committee that the state would have to put at least €9 billion into saving Bankia, which he said would be fully nationalised in the process.
At the same time government sources said de Guindos and other top officials were at odds over how to help the country's 17 autonomous regions refinance €36 billion in debt that comes due this year.
Bankia's new management team will undertake a complete assessment of the lender's capital needs and will present its plan in mid-June, de Guindos said.
The government will recapitalise Bankia's parent group BFA using the state-backed bank restructuring fund, the FROB, and then will fund Bankia through a capital increase including preferential shares for existing shareholders, he said.
He said the Bankia rescue would include €7.1 billion in provisions for losses from bad loans and €1.9 billion in capital buffers, as well as address issues flagged by Bankia's auditors.
The clean-up of Bankia and BFA, which account for 10% of deposits in Spain, would take care of most of the problems in the country's banking system, he said.
"I insist BFA-Bankia is a specific case and it's not correct to extrapolate its problems to the rest of the Spanish financial system," he told lawmakers.
Bankia is the most exposed of Spain's banks to losses stemming from a 2008 property crash. But economists said the focus had now moved on the banking sector as a whole.
Prime Minister Mariano Rajoy reiterated on Wednesday that Spain would not seek external funds to bail out its banks.
"The government has no interest and no intention in accessing any funds from the European Union or any other organisation," Rajoy said following a meeting with French Prime Minister Francois Hollande on Wednesday.