Conservative Spanish prime minister Mariano Rajoy insists the country's banking sector will not need an international rescue as concern over the bailout of nationalised lender Bankia sent its stock price plummeting while Spain's borrowing costs soared.
"There will be no rescue of the Spanish banking sector," Mr Rajoy said.
But he added that the government had no choice but to bail out Bankia, which has been crippled by Spain's real estate slump.
"We took the bull by the horns because the alternative was collapse," said Mr Rajoy, stressing that Bankia clients' savings were now safer than ever.
Bankia, Spain's fourth-largest bank, is estimated to have 32 billion euro (£25.6 billion) in toxic assets and was effectively nationalised earlier this month when the government converted 4.5 billion euro (£3.6 billion) in rescue funds it gave last June into shares.
The lender's shares fell 28% on opening in Madrid - Bankia's first day back on the stock exchange following its announcement on Friday that it would need the 19 billion euro (£15.2 billion) in state aid to shore itself up against its bad loans, a far bigger bailout than expected. The shares, which recovered slightly in the afternoon, closed 13.4 % lower at 1.36 euro.
Bank of Spain estimates show Spain's lenders are sitting on some 180 billion euro (£144 billion) in assets that could cause them losses.
The government fears the cost of rescuing the country's vulnerable banks could overwhelm its own finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25%, and force it to seek a rescue by the rest of Europe.
Among the chief concerns surrounding Bankia's request for state aid, the largest in Spanish history, is just how Spain plans to fund it. The country's borrowing costs have risen sharply over the past few weeks.
Spain's interest rate, or yield, for 10-year bonds on the secondary market - a key indicator of market confidence - rose 0.16 percentage points to close at 6.45%. Mr Rajoy said this had more to do with broader concerns about Europe and Greece and dismissed suggestions it had anything to do with Bankia.
A rate of 7% is considered unsustainable over the long term and there is concern that Spain might soon be pushed join the ranks of Greece, Ireland and Portugal and seek an international bailout.