Spanish 10 year borrowing costs neared the 7% danger level and Bankia shares hit record lows today.
This comes after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.
Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs - the spread over Germany reached the highest since the euro's launch - on concern about its future.
He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has gone bust.
"There are major doubts over the euro zone and that makes the risk premium for some countries very high. That's why it would be a very good idea to deliver a clear message there's no going back for the euro," Rajoy told a news conference.
"There will not be any (European) rescue for the Spanish banking system," he added.
He gave no details of bank recapitalisation plans but backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks direct.
Government sources told Reuters that Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders - moves which would push the country's debts above the 79.8% of economic output which had been expected this year.
"This method has been used by Germany and by Ireland in the past, it is perfectly valid," a government source told Reuters.
The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia. A final decision had not yet been made on which option to take.
Bankia's parent company BFA has asked for €19 billion in government help, in addition to €4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments.
Investors increasingly believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout which the euro zone can barely afford.
The premium investors require to hold Spanish government bonds over German counterparts hit a euro-era high at 505 basis points, denoting a lack of confidence in Madrid's efforts to stabilise its finances and ailing banks.
Having dropped to around 4.7% earlier this year, helped by the ECB's creation of a glut of three-year money, 10-year borrowing costs are now approaching 6.5% and closing in on the 7% level widely seen as unsustainable.
The one advantage Spain has is that it has issued well over half the debt it needs to this year, in the first five months. But that advantage is being eroded.
The government said last week its highly indebted regions faced €36 billion of debt refinancing bills this year, way above the previously stated €8 billion. Catalonia said it was running out of options and needed central government help.
A plan to recapitalise Bankia with Spanish government bonds, which the bank could then use as collateral to get cash from the ECB, could add to the government's refinancing problems. Spain's Treasury insisted it would repay debt maturing without problems.
Spain's central government and regions need to refinance €117.5 billion of debt by the end of the year, while funding a deficit worth €52 billion. It has already shifted more than 55% of its debt issuance for the year but about half of the remaining debt maturing in 2012 will have to be repaid in the last three months of the year, making it imperative borrowing costs have been brought down by then.
Bankia parent BFA is set to report the biggest loss in Spain's banking history. "The figures are much higher than any other release from any other bank," a financial source with direct knowledge of the bank's situation told Reuters.
Despite the €23.5 billion rescue cued up for Bankia, its shares tumbled by about 13%, pressuring some weaker peers. Its drastic hike in provisions to cover potential losses from repossessed property and souring consumer debt has raised the prospects that other banks may need to do the same.
A wider audit of Spain's banking system should reveal by June what capital gap other banks will need to fill.