Spain's economy sank further into recession in the second quarter as investors jittery over an undeclared funding crisis in its regions pushed the country towards a full bailout, its central bank said today.

Economic output was down 0.4 per cent in the three months from April to June, having dropped by 0.3 per cent in the first quarter, the Bank of Spain said in its monthly report.

Though economy minister Luis de Guindos denied a full-scale financial rescue was on the cards, on top of the 100 billion euros provision made for the country's banks, Spain's sovereign bond yields remained in the danger zone.

As against de Guindos' contention that there was little else Spain could do to ease the tensions after it approved a 65-billion-euro austerity package last week, the central bank's deputy governor called for more belt-tightening.

Fernando Restoy remarked after a conference in Madrid that the current market problems reflected problems in Spain as also the euro zone.

Spain, he added, needed to continue further along the same line, with more cuts, more reforms, which would restore market confidence and mechanisms that strengthen the monetary union.

According to earlier media reports, half a dozen regional authorities were ready to follow Valencia, which was seeking financial support from Madrid.

Hit by prohibitively high refinancing costs, 17 regional governments have been shut out of international debt markets, and the worst hit have turned to the central government to meet bond redemptions.

Spain's sovereign debt yields stood above 7.5 per cent on 10-year paper today, well above the 7 per cent level that led to spiraling borrowing costs in other euro zone states and forced them to seek bailouts.

Signalling the growing awareness among the euro zone's more robust economies of the need to shore up Spain, de Guindos would travel to Berlin tomorrow to meet with his German counterpart Wolfgang Schaeuble, say analysts.

Reports quoting Schaeuble's spokeswoman Marianne Kothe said that Germany believed that the reforms already initiated by Spain would help calm the markets. The region's funding problems had "nothing to do with" the European rescue deal for the country's banks, she added.

Meanwhile worry over Greece came to the fore again with international lenders scheduled to gather in Athens to discuss the terms of further rescue payments, after its prime minister said the country was mired in "Great Depression".

As the sentiment continued to be one of risk aversion in the financial markets, five- and 10-year German government bond yields hit new lows and US T-note yields were down to their lowest since the early 1800s.

Meanwhile the Spanish region of Murcia edged closer to following in the footsteps of Valencia, which set up an 18 billion euro fund earlier this year to help the regions refinance their debt. According to media reports half a dozen others were set to follow down the same path.

Euro zone finance ministers on Friday approved a bailout for Spain's banking sector, which coupled with fresh austerity measures and looser fiscal targets sought to avoid a full rescue that the euro zone could barely afford.

However, with Spanish bond prices in free-fall in illiquid markets, worries that the banking bailout alone was unlikely to be enough dominated the sentiment.