Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.

The state takeover of its fourth-largest lender, Spain's biggest bank rescue, has intensified fears that the rising cost of helping banks may force the euro zone's fourth largest economy to seek an Irish-style international bailout.

The Economy Ministry declined to comment on the matter on Sunday. European Union authorities are expected to sign off plans to recapitalize Bankia in June.

The Bankia rescue will affect Spain's public debt to gross domestic product ratio and the deficit at a time when the country has implemented growth-stifling austerity measures aimed at bringing state debt down to Europe-agreed levels.

ECB policymakers, who have pumped over 1 trillion euros into Europe's financial system in recent months, are resisting pressure to do more to shore up the euro zone.

"The biggest problem here is that the ECB could object. That's a legal issue, but technically it is possible," said Jose Carlos Diez, economist at Intermoney Valores.

Spain's borrowing costs have risen in recent weeks as investors fret about a possible exit of Greece from the euro zone, making it less likely that Spain could raise cash needed for the Bankia rescue by issuing new debt.

Spain's risk premium, as measured by the spread between German and Spanish benchmark bonds, was hovering near 500 basis points on Friday.

(Writing by Sonya Dowsett; Editing by Louise Ireland and Fiona Ortiz)

• A Permanent Economic Emergency