Spain is expected to request European aid for its ailing banks at the weekend to forestall worsening market turmoil, becoming the fourth and biggest country to seek assistance since the euro zone's debt crisis began, EU and German sources said.
Four senior EU officials said finance ministers of the 17-nation single currency area would hold a conference call on Saturday to discuss a Spanish request for an aid package, although no figure had yet been set.
The Eurogroup would issue a statement after the meeting, they said.
"The announcement is expected for Saturday afternoon," one of the EU officials said.
The move comes after Fitch Ratings slashed Madrid's sovereign credit rating by three notches to BBB from A on Thursday, highlighting Spain's exposure to its banks' bad property loans and to contagion from Greece's debt crisis.
"The government of Spain has realised the seriousness of their problem," a senior German official said.
He added that an agreement had to be reached before a Greek general election on June 17 which could cause market panic and lead to Athens leaving the euro zone if parties opposed to the terms of an EU/IMF bailout win.
The EU and German sources spoke on condition of anonymity due to the sensitivity of the matter.
In Madrid, where the Spanish cabinet was holding its weekly meeting, a government spokeswoman said she was not aware of any pending announcement on a bank rescue. She recalled that Prime Minister Mariano Rajoy said on Thursday he would await the outcome of two external audits later this month before talking with Europe about how to recapitalise troubled lenders.
In Brussels, the European Commission's spokesman on economic and monetary affairs, Amadeu Altafaj, said he could not confirm that there would be a teleconference of finance ministers and said Spain had made no request for aid. "There are no signs of a request," he said.
The euro zone has been under strong pressure from the United States and other major partners to take swift, decisive action to prevent the debt crisis spreading and causing greater damage to the world economy.
Fitch said the cost to the Spanish state of recapitalising banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion) - or 6 to 9 percent of Spain's gross domestic product. The higher figure would be in a stress scenario equivalent to Ireland's bank crash.
An International Monetary Fund report, due to be published on Monday, is expected to estimate Spanish banks' capital needs at a lower figure of 40 billion euros, but market conditions have deteriorated since the data was collected, officials said.
European shares and the euro fell amid mounting concern over Spain following the Fitch downgrade. Spanish bond yields rose after the steep credit rating cut.
While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state off the credit markets.
That would be crucial to avoid overstraining the euro zone's rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.
The sudden escalation of the Spanish banking crisis, dramatised by last month's hasty nationalisation of troubled lender Bankia, has contributed to raising Italy's borrowing costs towards danger levels.
The deputy governor of the Bank of Spain told parliamentarians on Thursday that 9 billion euros would also be needed to cover additional losses at nationalised banks CatalunyaCaixa and NovaGalicia, according to one source.
Treasury Minister Cristobal Montoro caused consternation on Tuesday when he said Spain was effectively being shut out of capital markets by spiralling borrowing costs. Madrid managed to sell 2.1 billion euros in bonds on Thursday at higher yields, showing it could still access credit markets.
The aim of a European bank rescue package would be to relieve pressure on the state and enable it to keep borrowing on the markets.
A "bailout lite" would also help salve Spanish pride. Spain is the world's 12th largest economy and No. 4 in the euro zone. EU and German officials have cited prickly national pride as a barrier to requesting a full assistance programme.
Any political conditions would be light, related to the banks and would probably not add to the austerity measures and structural economic reforms which Rajoy's government has already put in place, EU and German sources said.
The European Commission and EU paymaster Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.
German Chancellor Angela Merkel said on Thursday that Europe was ready to act to ensure the stability of the euro zone.
"It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary," she said, referring to the euro zone's temporary bailout fund, the EFSF, and to its permanent successor, the ESM.
It was not immediately clear which of the funds would be used for the Spanish package. The ESM's rules are more flexible and do not require unanimous agreement by member states, avoiding the risk of political obstacles in a small creditor country. But the permanent fund is only expected to enter into force in mid-July, once ratification is completed. (Additional reporting by Luke Baker and Jan Strupczewski in Brussels, Andreas Rinke in Berlin and Jesus Aguado in Madrid. Writing by Paul Taylor, editing by Mike Peacock)