Spain's economic outlook darkened Friday as it warned its recession will drag on through 2013 and one of its indebted regions reached out for emergency aid from the cash-strapped government.
The regional authority of Valencia said it was applying to borrow from a fund of 18 billion euros set up last week by the central government for struggling regions.
In response, the Madrid stock exchange plunged by more than five percent, dragged down by banking shares which found no support in a eurozone rescue deal for the sector finalised by finance ministers Friday.
Spanish long-term borrowing costs meanwhile rose to levels considered unsustainable, reflecting growing concerns about Spain's financial stability.
"The steady stream of bad economic and financial news coming out of Spain is deconstructing foreign investor sentiment," said Raj Badiani of analyst group IHS Global Insight.
The economy is set to shrink by 1.5 percent in 2012 , a slight improvement on a previous forecast of 1.7 percent -- and by a further 0.5 percent in 2013, Budget Minister Cristobal Montoro said in his latest economic forecasts.
The government had previously expected 2013 growth of 0.2 percent.
A budget ministry official told AFP the unemployment rate this year would hit a huge 24.6 percent, topping an earlier estimate of 24.3 percent in a sign of the ongoing impact of Spain's bitter recession.
The economy is forecast to return to growth of 1.2 percent in 2014 and 1.9 percent in 2015, Montoro told a news conference after a cabinet meeting.
"For next year the economic scenario is that the recession will continue, but more softly," he said.
Unemployment will peak this year before declining to 24.3 percent in 2013, 23.3 percent in 2014 and 21.8 percent in 2015, the ministry said.
"There is not positive employment but the destruction of jobs will stop," Montoro said.
Stricken by the bursting of a construction bubble in 2008, Spain is struggling in its second recession in four years.
Its conservative government has announced pay cuts, tax hikes and other austere economic measures worth tens of billions of euros in its efforts to rein in its public deficit.
It is due this month to become the fourth eurozone country, after Greece, Ireland and Portugal, to get bailout funds in the crisis after the eurozone Friday approved aid for Spanish banks of up to 100 billion euros ($122 billion).
Despite this, Spanish 10-year bonds markets jumped above well above the 7.0 percent danger level on Friday.
The difference between the yields -- the return earned by investors -- on Spanish and safehaven German bonds also moved dangerously high, topping 600 points (six percentage points).
"This is surprising, especially considering the recent package of savings measures ... and the definitive validation of the bank bailout," wrote Daniel Pingarron, a strategist at IG Markets trading group.
"A large number of investors think that the possibility of a break-up of the euro is rising."
With Spain struggling to stabilise its public finances, its eurozone partners agreed this month to relax its deficit-reduction targets, which place a lot of pressure on the regions to curb spending.
They eased the targets to reduce the overall public deficit to 6.3 percent of GDP in 2012 from an earlier target of 5.3 percent; to 4.5 percent from 3.0 percent in 2013 and then set a 2.8-percent goal for 2014.
Thursday saw the biggest in a recent series of street protests that erupted last week when Prime Minister Mariano Rajoy announced new deficit-cutting measures to save 65 billion euros ($80 billion).