Spain's borrowing cost has risen to dangerously high levels as finance ministers of the 17 countries that use the euro began to gather in Brussels to discuss terms of a rescue package for the country's stricken banks.
The interest rate, or yield, on the country's 10-year bonds rose 16 basis points to 7.03%, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the level at which Greece, Ireland and Portugal all sought an international bailout. Stocks on Madrid's benchmark index fell 1.5%.
The yield indicates what rate a government would have to pay to raise money from financial markets when it holds bond auctions. While Spain can afford the high rates for a few weeks at least, it would find them too expensive in the longer term.
Spanish officials had originally indicated that it would decide on Monday how much the country's troubled banks would get from a 100 billion euro (£79 billion) lifeline from other members of the 17-country eurozone. Spain's bank industry has been struggling since 2008 under the weight of toxic loans and assets following a collapse in the country's property market.
But an official with Spain's economy ministry said last week that the meeting was not expected to generate a figure for how much Spain would tap. Ministers planned to discuss terms of the loan and may or may not finalise them, said the official.
Outside auditors are expected to complete rigorous assessments of Spanish banks by July 31. Separate stress tests will also be conducted on individual lenders banks to determine how much each bank needs to strengthen its balance sheets against further economic shocks if they cannot raise capital on their own, the official said. These results are due to be published in mid-September.
Investors fear that a full-blown bailout of Spanish public finances would be too large to handle. The country's economy is the fourth largest among the 17 nations that use the common euro currency - behind Germany, France and Italy. Spain's economy is also larger than those of Greece, Ireland and Portugal combined.
The interest rate on Spanish 10-year bonds hit a eurozone high of 7.18% in intraday trading on June 18 before closing at 7.12% that day, according to financial data provider FactSet.
A European Union official said Spain may be given an extra year to meet its budget deficit target of 3%. The official said finance ministers from the 17 eurozone countries will consider the extension to 2014 when they meet this evening in Brussels. Another official said ministers hope to achieve a "political understanding" of conditions for a bailout loan for Spain's banks. The "memorandum of understanding" will need to be approved by each eurozone country.
The ministers will also meet Greece's new finance minister, Yannis Stournaras, for the first time and discuss whether to adjust conditions accompanying Greece's bailout. Officials said no formal decisions are expected from the meeting.