Stocks down on Spain jitters

European shares took a dive in early Wednesday trading and looked to remain on track for a third straight month of losses. Analysts blamed the drop in the value of stocks on the continuing banking crisis in Spain.

"There have been some requests for bailout funds to be used to help Spanish banks to recapitalize, but the difficulty for the European Central Bank is to know where that stops," UK finance expert Keith Bowman told Reuters news agency. "There are a lot of people who would even question whether the bailout fund is big enough to rescue Spain."

Spanish banks, including Banco Santander and BBVA, were among the biggest losers early on Wednesday.

The trouble with Bankia

The Financial Times newspaper reported the ECB had rejected a scheme for Spain to recapitalize its half-nationalized lender, Bankia. Madrid had drawn up a plan whereby the state would issue debt bonds to Bankia so that it could use them as collateral for fresh funding from the European Central Bank.

But ECB officials were quoted as saying that this method amounted to direct financing of the Spanish state by the central bank which was counter to ECB statutes.

Spanish savings banks Ibercaja, Liberbank and Caja3 confirmed on Wednesday they would merge to form the country's seventh largest lender, with 114-billion-euro ($142-billion) in assets. Savings banks are seen as the weakest link in the banking system and authorities have pressed them to merge into what it's hoped will be stronger and more crisis-resistant institutions.

hg/mll (Reuters, AFP, dpa)