Spanish government bond yields reached a euro-era high of 7.5% today.
This is on fears the government will lose access to debt markets and need a full bailout as its regions began lining up for financial help.
Worry over Greece resurfaced with international lenders scheduled to gather in Athens to discuss the terms of further rescue payments, after its prime minister said the country was mired in a "Great Depression".
As risk aversion dominated financial markets, five- and 10-year German government bond yields hit new lows and US T-note yields hit their lowest since the early 1800s.
The Spanish region of Murcia moved closer to following Valencia in seeking financial aid from the government, which set up an €18 billion fund earlier this year to help the regions refinance their debt. Media reported half a dozen others were ready to do likewise.
"Given the market reaction on the back of the news that more and more regions are looking to tap into the liquidity fund..., it will be very difficult for Spain to circumvent further support for itself," said Norbert Aul, a rate strategist at RBC Capital Markets.
Euro zone finance ministers approved on Friday a bailout for Spain's banking sector, which along with fresh austerity measures and looser fiscal targets was aimed at avoiding a full rescue that the euro zone can barely afford.
But Spanish bond prices were in free-fall in illiquid markets, reflecting worries that the banking bailout alone was unlikely to be enough.
Ten-year yields, which rise as prices fall, were up 25 basis points at 7.53% and two-year yields were up 95 bps at 6.71%.
Short-dated yields have risen more than longer-dated ones, flattening the curve, because of a perceived rise in credit risk, while a spread of around 110 cents between prices at which investors were willing to buy and sell 10-year paper reflects the lack of liquidity in the markets.
Italian bonds were pulled down with Spain's, with 10-year yields up 15 bps at 6.36%, rising above the Irish equivalent for the first time since January 2009.
While the euro zone's bailout funds could scrape together enough cash to rescue Spain, analysts say there are insufficient funds to support Italy as well.
"The bid/offer spreads are so wide it's nearly impossible to get anything done," a trader said. "We saw some real money accounts selling Italy in volume first thing but that dried up once the market fell."
Spain must make coupon and redemption payments to bondholders of €20 billion next Monday, followed by nearly €25 billion in October, according to Reuters data.
Looking further out, €60 billion worth of paper is due for repayment next year, with a similar amount due in 2014.
RBC's Aul said Spanish auctions would become very difficult at current yields and that as soon as primary market access was at stake the likelihood the country would have to ask for support in some form would increase significantly.
"The first focus should be on any measures by the (euro zone rescue funds) that offer primary market support, as it is not feasible to take a sovereign of the likes of Spain completely off the primary market, as was the case for Ireland, Portugal and Greece."
The euro sank to a near 12-year low against the yen and also lost ground against the dollar, reflecting continued doubts about the durability of the european common currency.