Traders were alarmed by signs that Mariano Rajoy was losing popular support for his programme to reduce Spain’s burgeoning debts, without which the country may need a Greek-style bail-out.
The prime minister’s PP party won 50 seats in the crucial Andalusia elections but failed to win a majority as the opposition leftist PSOE party won 47 seats.
Alastair Newton, political analyst at Nomura, said: “Failure to win in Andalusia, whose regional deficit was more than double its 1.3pc of Spanish GDP target for 2011 and which voted against the central government’s 1.5pc target for this year, represents a potentially serious setback in efforts to rein in the total national deficit to 5.3pc.” He added: “The outcome in Andalusia may also make the challenges PP faces at the national level even more daunting.”
Mr Rajoy faces a tough week, with a general strike scheduled for Thursday followed by Spain’s budget on Friday.
Spain’s Ibex fell 0.7pc on Monday, while the yield on its 10-year bonds – the benchmark for its borrowing costs – rose yet again. Germany’s DAX rallied 1.2pc after the Munich-based Ifo think-tank said business confidence had improved unexpectedly during March. Other Europe bourses were more muted - in London, the FTSE 100 clambered up 0.7pc. Concern over Spain’s ability to manage its debts has been mounting and is likely to be the focus of the eurozone finance meeting in Copenhagen on Friday.
Finance ministers are under pressure to agree to boost the eurozone’s bail-out capabilities - particularly as a show of support for Spain.
Angela Merkel, the German Chancellor, on Monday insisted the firepower of the European Stability Mechanism (ESM) should not be raised beyond its €500bn cap but agreed she “could imagine that it could run in parallel” with the €440bn European Financial Stability Facility.
In an interview on the BBC's Newsnight programme on Monday night, Ms Merkel ruled out Greece or any other country leaving the eurozone. “We have taken the decision to be in a currency union,” she said.
“This is not only a monetary decision it is a political one. It would be catastrophic if we were to say [to] one of those who have decided to be with us, 'We no longer want you’.”