Spain's government on Friday will force banks to boost their financial cushion against risky property assets, an official said, as Madrid struggled to soothe international worries.
"There will be new provisions" against property-related assets demanded in a package of banking sector measures to be issued on Friday, an economy ministry spokeswoman said Wednesday, without giving further details.
The extra money set aside against risky loans and seized real estate linked to the distressed property sector could amount to 35 billion euros ($45 billion), said business daily Cinco Dias.
That figure comes in addition to the 53.8 billion euros in provisions already demanded in a reform announced in February.
The banking sector, overextended in a property boom that collapsed in 2008, is a major concern for international investors who fear the full losses on those assets have yet to be recognised.
Reports of the latest measures intensified the jitters on Wednesday, with the Madrid stock market plunging 3.03 percent in midday trading, dragged down by financial shares.
Santander, Europe's biggest bank by market capitalisation, plunged 5.10 percent, Bankia plunged 6.10 percent and BBVA fell by 4.73 percent.
In an attempt to soothe markets, the government has already said it will approve on Friday a new reform aimed at enabling banks to separate problem loans from their balance sheets.
At the same time, it has said it will inject public funds into Bankia, Spain's fourth-biggest listed bank. Spanish media say the state will put in 7-10 billion euros.
The prospect of public money being used to prop up Bankia, which says it has 12 million customers, prompted criticism from political opponents at a time when Spaniards are suffering cuts to spending in health and education.
Prime Minister Mariano Rajoy's conservative government, in power since December, has promised to lower Spain's deficit from 8.5 percent of gross domestic product last year to 5.3 percent this year and 3.0 percent in 2013.
Rajoy had previously denied any public money would be used to rescue the banks.
But he has come under growing pressure from eurozone neighbours and financial markets to strengthen Spain's financial positition, amid fears it could need a bailout like Greece, Portugal and Ireland.
The International Monetary Fund last month urged Spain to push further ahead with banking reforms.
Bankia, created from a merger of seven savings banks, had 37.5 billion euros in exposure to the property sector at the end of 2011, of which 31.8 billion euros were classed as problematic.
Bank of Spain figures last month showed commercial banks held problem real estate loans worth 184 billion euros, some 60 percent of their property portfolio at the end of 2011.
Market concerns about the impact on Spain's sovereign debt pushed the borrowing rate on government bonds sharply higher on Wednesday.
Benchmark 10-year bonds yields shot above 6.0 percent for the first time since mid-April.