Doubts about the viability of the Spanish government's bailout of BFA-Bankia - the country's fourth-largest financial institution - put the Iberian nation in the spotlight on Wednesday, as financial market jitters sent the country's debt-risk premium to a euro-era record of 539 basis points.

Markets were rattled after a report late Tuesday by London's Financial Times said the European Central Bank had rejected a Spanish government plan to directly recapitalize Bankia with government bonds.

The Spanish government and the ECB later denied the report, saying no such consultation took place, but it did little to allay investors' concerns.

Bankia, which was nationalized earlier this month and holds Spain's largest mortgage portfolio, said last Friday it needs another 19 billion euros ($23.5 billion) to boost loss provisions.

That is in addition to a 4.46-billion-euro ($5.77-billion) loan the institution received in late 2008 from the state-backed Fund for Orderly Bank Restructuring, or FROB.

That loan is to be converted into shares as part of the nationalization process.

The Spanish government, meanwhile, clarified Wednesday that it was not planning to recapitalize Bankia by using government debt as collateral to obtain cash from the ECB but rather by raising cash in traditional auctions of Treasury bonds.

Also Wednesday, the European Commission said it would recommend giving Spain another year - until 2014 - to bring its budget deficit down to an EU-mandated level of 3 percent of gross domestic product.

The European Union's executive arm also called for the creation of a "banking union" to bail out banks directly, obviating the need for already heavily indebted euro-zone governments to request those funds themselves.

The Spanish government has pledged this year to reduce the deficit to 5.3 percent of GDP, down from 8.9 percent of GDP last year, but deficit reduction means sharp spending cuts at time when the country has fallen into recession for the second time in three years.

On Wednesday, the interest rate on Spain's benchmark 10-year bond shot up to nearly 6.7 percent - unsustainable, according to many economists, and near the level at which Greece, Portugal and Ireland required an international bailout.

Meanwhile, Spain's debt-risk premium - the extra return investors demand on Spanish government bonds compared to safe-haven German debt - soared Wednesday to a euro-era record of 539 basis points.

Spain's banks have been hard hit by the collapse of the country's 1995-2007 real estate boom.

The 2008 global financial meltdown came as Spain was struggling with the bursting of the property bubble. The ensuing slump has led to numerous business failures and pushed the country's jobless rate above 24 percent.

Nearly half of Spaniards under 25 are jobless and tens of thousands of families have been evicted from their homes after falling behind on their mortgages. EFE