Spain's benchmark Ibex-35 index plunged 5.82 percent Friday, the biggest drop of the year, as soaring yields on sovereign debt prompted investors to flee equities.

The yield on the country's 10-year bond rose as high as 7.283 percent on the open market during the day, sending the country's risk premium - the extra return investors demand on that bond compared to equivalent, safe-haven German debt - up to 612 basis points.

Many economists regard the country's borrowing costs - which were above 6 percent for Spain's five- and seven-year notes in a debt auction Thursday - as already unsustainable over the long haul.

Spain's risk premium fell back slightly to 609 basis points by the end of trading Friday, although that still represented a new euro-era record.

Economists said market pressure on Spain mounted after the eastern autonomous community of Valencia said Friday it will request a bailout by the central government to settle its bills, becoming the first to tap into a newly created 18-billion-euro ($22 billion) fund to assist indebted regions.

The sharp drop in stocks came on the same day European economy and finance ministers gave final approval - without modifications - to a 100-billion-euro ($122-billion) aid package for ailing Spanish banks, a move applauded by the International Monetary Fund.

The selloff also came a day after Spain's Parliament ratified - with the sole support of the governing conservative Popular Party - austerity measures approved last Friday by Prime Minister Mariano Rajoy's Cabinet.

After Thursday's passage of measures including a rise in the VAT tax and cuts to public-sector wages and unemployment benefits, protests by tens of thousands of Spaniards were held in 80 cities nationwide and led to 15 arrests.

Spain's economy, already in recession for the second time in three years, will contract by another 0.5 percent in 2013, Finance Minister Cristobal Montoro said Friday. In April, the Spanish government had forecast a paltry 0.2 percent increase in the Iberian nation's gross domestic product next year.

Rajoy's administration also expects unemployment to remain virtually unchanged in 2013 at 24.3 percent.

In a press conference following a Cabinet meeting, Montoro said Spain is expected to remain in recession next year, although the drop in economic output should be "softer, with a drop in activity, but not as deep."

Spain's government opted for the latest austerity package - its fourth since Rajoy took office last December - as a condition for the bank bailout and for being granted more time by its euro-zone partners to bring its budget deficit in line with European Union mandates.

Spain's economy has been battered by the global recession and the collapse of a massive real-estate bubble, which has left banks saddled with toxic property assets.

Numerous businesses failures and sky-high joblessness (roughly 50 percent for those under 25), meanwhile, have led to a sharp drop in tax revenues.

Rajoy's administration says it is committed to growth but that the first step to economic recovery for Spain is getting its financial house in order. EFE