Spain's fourth largest bank has asked for a €19 billion government bailout due to heavy losses on property loans.
The newly nationalised Bankia also restated its 2011 accounts on Friday to give a €3 billion loss compared to a previously reported profit, as it dramatically wrote down bad loans, holdings in Spanish blue-chips, and repossessed property.
Standard & Poor's lowered its ratings on the debt of Bankia and four other banks and said it was taking a dimmer view of Spain's economy.
"Spain is entering a double-dip recession that will likely trigger a large increase in the volume of problematic assets that the financial system will accumulate in 2012 and 2013, which in turn will lead banks record high credit provisions," the ratings agency said in its report on the banks.
The Spanish government has already spent €4.5 billion to prop up Bankia, which holds some 10% of the country's total deposits.
Spain will have to go to the markets to raise debt to put into Bankia at a time when its borrowing costs are high.
However the government insists that Bankia's woes do not reflect the wider financial system in Spain.
While struggling to put a precise number on a banking sector clean-up, Spain has also revised up its 2011 deficit figure several times as additional spending from regional and local governments has come to light.
Meanwhile, the president of Catalonia, one of the wealthiest of Spain's 17 regions, said high interest rates demanded by wary creditors were making it hard for his administration in Barcelona to raise funds.
He called on the central government to guarantee joint bonds issued by regional authorities or otherwise underwrite regional financing.
"We don't care how they do it," Artur Mas told reporters, saying the Spanish economy would not grow if the regions struggle to pay monthly bills to suppliers.
Investors believe the banks' capital shortfall and a credit crunch for regional governments could force the euro zone's fourth-largest economy to seek international aid - a move that would throw further doubt on the future of the currency union.