Spain scraped through a key bond market test but failed to quash doubts over its future finances, analysts said after a treasury bond sale beat money-raising targets.
Investors had been nervously waiting for the government bond auction held on Thursday, fearing a flop could unleash new attacks on Spain's sovereign debt and reignite the flames of the eurozone debt crisis.
Overall, the treasury raised $3.3bn in an issue of two- and 10-year bonds, beating its own target of $1.5-2.5bn, a Bank of Spain statement said.
Spain paid a borrowing rate of 5.7 per cent for the benchmark 10-year bonds, sharply up from 5.4 per cent at the previous comparable auction on January 19.
The rate for the 10-year issue was not as high as some had feared, failing to breach the psychologically important 6-per cent level, and demand outstripped supply by more than two-to-one.
Spain even managed to pay a lower rate in the auction of two-year bonds, for which the yield eased to 3.463 percent from 3.495 percent at the previous comparable issue on October 6, 2011.
But Madrid's IBEX-35 leading stock index fell below 7,000 points for the first time in three years after the auction. It fell 1.58 per cent by late morning to 6,967.7 points, dipping below the symbolic barrier for the first time since March 2009.
The European Central Bank has helped to lower yields on Spanish and other fragile eurozone bonds by flooding banks with trillions of euros in cheap loans, which in turn flowed into sovereign bonds.
Spain's treasury, which has already raised about half of its 2012 financing requirements, had also lowered the money-raising target for this issue, said Daniel Pingarron, analyst at Spanish brokerage IG Markets.
"To me it seemed very good, the yield went up but by less than was expected. Also, we saw strong demand again as much for the two years as the 10 years," he added.
Overall, Spain's bond auctions were performing better than those of troubled eurozone partner Italy, Pingarron said.
"These tensions are not going to calm in the short term or even the medium term. They are tensions that in our view are a bit unfair and fairly exaggerated," he added.
"Spain has replaced Greece in the international and especially the Anglo-Saxon press as the country that has most problems. The problems are clearly enormous but reforms are being made."
International investors appeared to be fleeing Spain's sovereign debt, said a report by German-based private Berenberg Bank.
"Spanish banks, fuelled by cheap ECB liquidity, stepped into the breach, but if they became more reluctant to bid in future auctions, Spain could be forced to ask for help from its European partners," it warned.
Spain posted a public deficit, the shortfall of revenue compared to spending, of 8.51 per cent of gross domestic product in 2011, missing its 6-per cent target by a wide margin.
Prime minister Mariano Rajoy's conservative government, which took power in December, has promised to cut the deficit to 5.3 per cent of GDP in 2012 and 3 per cent of GDP in 2013.
Some in the markets have shown concern, however, that the focus on austerity could drive the economy even deeper into recession, making a debt rescue more likely.
"Despite the successful auction, we are long way from resolving anything," warned Javier Casal, deputy head of the public debt trading desk at Ahorro Corporation.
"The problem Spain has is serious, it is not a solvency problem but a liquidity problem. Now, the Spanish banks need money."
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