The Spanish region of Catalonia has asked the central government for a €5bn pay-out to help the struggling region, amid the country's latest GDP data showing it is in a deeper recession than feared.
Catalonia - home to cities including Barcelona - is seeking aid from an €18bn public fund set up this summer to support the country's 17 autonomous debt-riddled regions.
The news is particularly damaging for Spain as Catalonia represents one fifth of the Spanish economy.
Spanish bond yields jumped in response this afternoon, climbing 0.8% to 6.46%, as investors one again reacted to the possibility Spain will be forced to seek a full-blown bailout.
Meanwhile, official figures released from the Instituto Nacional de Estadistic today showed Spain's economy had contracted for a third consecutive quarter.
The economy shrank by 0.4% in the second quarter, and by 1.3% on an annual basis, worse than analysts feared.
It was the third consecutive contraction following a 0.3% decline in both the first quarter of this year and the final quarter of 2011.
Adding to its woes, private sector deposits fell nearly 5% to €1.5trn at the end of July from 1.58trn a month earlier, as consumers and firms rushed to withdraw their money from Spanish banks.
Analysts expect Spain's weakening economy to suffer further as austerity measures designed to cut the public deficit continue to take their toll. Spain needs to slash its deficit this year to 6.3% from 8.9% in 2011.
The Spanish government has already requested €100bn in loans from the eurozone's bailout fund to help shore up its banking system, which is struggling with bad debts from loans made in its property sector.
Spanish Prime Minister Marioano Rajoy has pledged he will do "what is best for the Spanish people" and is considering all options regarding a bailout, which has provided some respite for markets.
Although yields have jumped today, they remain below record highs seen in recent months when borrowing costs soared above 7%.
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