Spain's debt risk premium broke euro records after the central bank chief quit early and Madrid scrambled to finance a bank rescue.
The borrowing rate on Spain's 10-year bonds shot to a danger level of 6.703% as Spain battled to avoid becoming the next nation to fall to the euro crisis.
When compared to safe German debt, investors in Spanish bonds were demanding an additional 5.39 percentage points, a level that crashed through euro records set each day of this week.
Markets recoiled as a sense of turmoil engulfed Spain.
Stock prices skidded across the world on fears of a Spanish economic collapse and the European single currency plunged to $1.2439 - striking a low point that was last seen in July 2010.
Bank of Spain governor Miguel Fernandez Ordonez shook investors by announcing late last night that he would depart on June 10 - a month before his term comes to an end July 12.
The central bank chief, who said he was leaving early to give his successor time to take the reins, had sought in vain a hearing in the lower house of parliament to explain stricken lender Bankia's woes.
"Nothing is more important now than regaining confidence because without that we cannot resolve any of our problems," Ordonez told the Senate today.
Confidence in Spain has deteriorated in past months, and took a further hit in past weeks over "the management of the latest banking crisis," he said.
Spain's government this month instructed banks to set aside €30 billion in 2012 in case property-related loans go bad, on top of €53.8 billion demanded under February reforms. It also appointed independent auditors to value banks' property assets, hammered since the 2008 property crash. That decision was widely seen as showing a lack of confidence in the central bank.
However, Germany has expressed confidence in the economic reforms set out in Spain, as spiralling borrowing costs and the resignation of the central bank chief caused further turmoil on the markets.
"The federal government has confidence in the reform path the Spanish government has laid down," Steffen Seibert, Chancellor Angela Merkel's spokesman, told a regular government briefing.
Bankia at centre of Spanish banking storm
At the centre of the banking storm, Bankia has asked the government for €19 billion in capital in addition to €4.465 billion invested by the state earlier this month to salvage its books. But no-one seems clear about where the money will come, especially when debt markets are charging exorbitant sums to lend to Spain.
Economy Minister Luis De Guindos said the state-backed Fund for Orderly Bank Restructuring (FROB) would issue bonds to raise capital, which it could then inject into the bank. He denied a report in the Financial Times that the European Central Bank had rejected one option being considered by Madrid.
The Economy Ministry had floated this week a plan to issue government bonds and transfer them directly into Bankia, which could then use them as collateral to borrow from the market or the ECB.
"Pay more attention to the Spanish government than the Financial Times," De Guindos said. "The Spanish government has not presented any plan to the European Central Bank nor has the European Central Bank rejected anything whatsoever related to it."
The ECB also issued a statement denying it had taken a position or being consulted on the plan.
But the government failed to quash growing concerns over Spain's financial sector. Spain's El Mundo this week said three other banks, CatalunyaCaixa, NovacaixaGalicia and Banco de Valencia, could need another €30 billion in public funds to meet new regulations.
Yet another lender, Banco Popular, whose bonds have been downgraded to junk bond-status, said this week it was in talks to sell its Internet banking business in a scramble for cash.
In addition to the banking crisis, displayed graphically in daily home-owner evictions, investors fret about a recession, predicted by the authorities to last at least until mid-2012, and a jobless rate of 24.4% in the first quarter, the highest in the industrialised world.
Despite all those troubles, Prime Minister Mariano Rajoy says he will not flinch from an austerity plan aimed at cutting the public deficit from 8.9% of economic output last year to 3% by 2013. In Brussels, an official said that the European Commission may recommend giving Spain an extra year to meet that target but only with tough conditions attached.
