Spain's central bank said the level of bad debt in the country's banks dropped to 10.4% in December 2012 from 11.38% a month earlier.

This was due to the transfer of toxic assets to the country's new bad bank.

The bank released data today which showed that non-performing loans totaled €167.48 billion in December.

This is down from €191.63 billion the previous month - the first reduction in 17 months.

Spanish lenders, hit by the country's property market collapse in 2008, have begun transferring their toxic loans to the bad bank, called SAREB. The body was set up as a condition of Spain receiving €40 billion in European Union assistance for its financial sector.

With 26% unemployment, Spain is struggling to emerge from its second recession in just over three years.