Banks in Spain must inject a further €17bn (£14.5bn) to cover capital needs, after a number of lenders failed tests set by Banco de España, Spain's central bank.
The extra money would be required to prevent a collapse in confidence after ratings agency Moody's downgraded Spain's debt, sparking fears that the extent of bank debt had been underestimated.
The Spanish branch of Barclays has been hit hardest by the news, being told to find an extra €552m .
Moody's downgraded Spain's debt to a rating of Aa2, its third highest, and said the cost of rescuing the banking sector would be more than double the initial estimate made by the Banco de España of €17bn.
The market reaction to the news saw the FTSE 100 fall by 90 points to finish at 5845.29.