Spanish borrowing prices hit a new historic high after a second region said it too may seek rescue aid, roiling world markets already hit by a surprise ratings warning to Germany.
The Spanish stock market plunged for a third day, falling by 3.58 percent to its lowest close since April 2003. Other markets limited their losses, but fears that Madrid will soon need a full-blown bailout loomed large.
Spanish and German finance ministers sought to contain such fears, saying that Spain's soaring borrowing costs do not correspond to its economic strength or the "sustainability of its public debt."
The joint statement by Wolfgang Schaeuble and Luis de Guindos after talks in Berlin followed another statement from Madrid reportedly on behalf of Spain, France and Italy expressing impatience at a delay to major financial reforms.
"Speed is an essential condition for the success of any European action," the statement quoted Spain's junior minister for European Affairs, Inigo Mendez de Vigo, as saying.
But Italy expressed surprise at the "supposed" statement and France also categorically denied it was behind a call that, if confirmed, would have likely been interpreted as a thinly disguised challenge to Germany.
"There has been no common approach with Italy and Spain," French European Affairs Minister Bernard Cazeneuve said. "I have not asked for the immediate application of the accords. It makes no sense to say that."
Following the angry comments by Rome and Paris, Mendez de Vigo backtracked, saying he didn't intend to say that the three countries had issued a joint statement.
In Berlin, Schaeuble and de Guindos only stressed "the importance to work -- together with European Partners -- on the quick implementation of the European Council decisions of June 29."
The accord struck in Brussels in June paves the way for the eurozone's 500-billion-euro ($600 billion) bailout fund to recapitalise ailing banks directly, without passing through national budgets and adding to struggling countries' debt mountains.
But this can occur only after a Europe-wide banking supervisory body is set up, with leaders aiming for that to happen at the end of the year.
Amid the financial turmoil, the euro fell 0.4 percent against the dollar in New York trade on Tuesday, touching fresh two-year lows as Spain appeared to inch closer to a bailout.
The euro fell as low as $1.2059, its lowest level since June 2010, before recovering slightly.
"It seems markets this week have recognised that Spain is following Greece's path, with Spain's bond yields at levels that forced policy makers to step in to help Greece and Portugal," said Ishaq Siddiqi, market strategist at ETX Capital.
More bad news was delivered by Moody's ratings agency, which lowered the outlook on the EU's bailout fund from stable to negative Tuesday, a day after threatening the triple-A credit ratings of three of the eurozone's major guarantors.
Moody's said its decision to lower the outlook on the European Financial Stability Facility (EFSF) reflected the changes in outlooks on Germany, the Netherlands and Luxembourg. But it maintained the EFSF's triple-A rating.
The EFSF, which was established with a total lending capacity of 440 billion euros, is to be replaced eventually by the 500 billion euro permanent rescue fund called the European Stability Mechanism.
Earlier Tuesday, the finance minister of Catalonia, Spain's second biggest region, raised the prospect of a regional bailout in a morning interview with BBC radio.
Another big region, Valencia, last week became the first to apply for help from an 18-billion-euro ($22 billion) fund set up by the central government to rescue struggling regions.
Economists increasingly agree that a eurozone bailout of up to 100 billion euros agreed for Spain's banks will be insufficient to get the country through the crisis brought on by a collapse of its real estate boom in 2008.
The yield or rate of return on the benchmark 10-year Spanish government bond crept ever higher Tuesday, at 7.621 percent, hovering at levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
It marked the highest level that Spain's yield has reached since Madrid adopted the euro.
Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.
The ECB has done this before but it is not clear if it is ready to step in again now without clear backing from the major eurozone states, especially Germany.
The shock decision by ratings agency Moody's to slash the outlook of Germany, Europe's top economy and paymaster, from "stable" to "negative" came as auditors arrived in debt-wracked Greece.
Moody's said its decision was based on "rising uncertainty regarding the outcome of the euro area debt crisis (and the) ... increased likelihood of Greece's exit from the euro area."
In Athens, auditors from the International Monetary Fund, ECB and European Union arrived to review Greek progress towards securing a further slice of bailout cash before the country goes bankrupt.
Officials in Germany have insisted they will wait for this report, due in early September, before casting judgement on Greece's ability to stay in the eurozone.