Spain's Central Bank says economy sank deeper into recession in second quarter

Spain's economy sank deeper into recession in the second quarter, its central bank said as investors spooked by an undeclared funding crisis in its regions pushed the country ever closer to a full bailout.

Economic output shrank by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter, the Bank of Spain said in its monthly report.

Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the 100 billion euros already earmarked for the country's banks, but Spain's sovereign bond yields stayed mired in the danger zone.

In contrast to de Guindos, who told lawmakers 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 said more belt-tightening was needed.

"(Current market problems) reflect problems in Spain as well as the euro zone," Fernando Restoy said after a conference in Madrid when asked about market stress.

"We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union."

Earlier, media reports suggested half a dozen regional authorities were ready to follow in the footsteps of Valencia in seeking financial support from Madrid.

Prohibitively high refinancing costs have virtually shut all of the 17 regional governments out of international debt markets, forcing the worst hit to seek loans from the central government to meet bond redemptions.

Spain's sovereign debt yields rose above 7.5 percent on 10-year paper today, well above the 7 percent level that triggered the spiral in borrowing costs that led to bailouts for other euro zone states.