Moody's Investors Service on Monday cut its credit ratings on 28 Spanish banks, saying the weakening financial condition of Spain's government is making it more difficult for that country to support its lenders.
The banks are also vulnerable to losses from Spain's busted real estate bubble, Moody's said.
The announcement from Moody's came on the same day that Spain's government formally asked for help from its European neighbors in cleaning up its stricken banking sector. However the request left many questions unanswered, including how much Spain would ask for out of the $125 billion loan package it has been offered.
That uncertainty led to losses Monday in stock markets in Europe and the U.S. Bond investors pushed Spain's borrowing costs higher, a sign of wilting confidence in the country's ability to support its banks.
The downgrades reflect Moody's view on the ability of the 28 banks to repay their debts. Moody's said the lower ratings stemmed from its having downgraded the Spanish government's credit rating by three notches earlier this month.
Among the lenders suffering rating cuts were Spain's two biggest international banks: Banco Santander and Banco Bilbao Vizcaya Argentaria.
A downgrade usually means that banks will have to pay more to service their debt. Investors demand higher interest for riskier debt, which is what the downgrades represent.
Spain formally asked the European Union on Monday for rescue loans to help clean up its troubled banking industry. The Spanish economy, the fourth-largest of the 17 countries that use the euro currency, is suffering from the aftershocks of a real estate bust that has devastated families as well as banks. Unemployment is nearly 25 percent.
The Spanish government's financial fate is intertwined with that of the country's banks. Two-thirds of the government bonds are owned by Spanish banks, pension funds and insurance companies.
Moody's said in a statement that the agency is encouraged by measures being taken by Spain to support its banks.
Moody's move came four days after the rating agency downgraded some of the world's biggest banks, including Bank of America, JPMorgan Chase and Goldman Sachs, reflecting concern over their exposure to the violent swings in global financial markets. Moody's also cut the ratings on seven German and three Austrian banks this month.
The downgrades haven't come as a surprise. But they come at a time of great uncertainty in the global economy. Europe's 17-nation currency union is under threat, the U.S. economy is slowing and the economies of India, Brazil and China are cooling.
EU leaders are meeting Thursday and Friday in Brussels for another summit aimed at reining in Europe's debt crisis. Debt-wracked Greece is looking to renegotiate some of the budget-cutting measures it has agreed to in exchange for continued support from international lenders. The summit comes just a week after Greece's new coalition government was formed following months of political turmoil and two inconclusive elections.
Two international audits last week found that Spain could need as much as $77 billion. The government wants the loans to go directly to the banks so that it won't be responsible for repayment in case of a default. That idea has met with resistance, however.
The size and interest rates of the loans likely will be discussed at the EU summit this week.
Investors are concerned that beyond a rescue for its troubled banking sector, Spain itself may ultimately need a full country bailout like Greece, Ireland and Portugal.
Steep losses stung stock markets on both sides of the Atlantic Monday. The Dow Jones industrial average dropped 138 points to close at 12,502.66, a loss of 1.1 percent. The broader Standard & Poor's 500 index fell even more, 1.6 percent.
In Europe, Britain's FTSE 100 stock index fell 1.1 percent, France's CAC-40 slumped 2.2 percent, while Germany's DAX dropped 2.1 percent
Many analysts believe big banks, including those in the U.S., would be the first to feel the hit of a freeze-up in Europe's financial system if Spain isn't able to convince bond markets that it can rescue its hobbled banks.
The uncertainty pushed borrowing costs higher for Spain's government on Monday. Its stock market plunged 3.7 percent.
The other 26 banks downgraded by Moody's are Caja Laboral, Banca March, Caja Rural de Navarra, Caixa Bank, Instituto de Credito Oficial, Bankinter, Banco Cooperativo Espanol, Banco Popular Espanol, Banco Sabadell, Kutxabank, Unicaja Banco, Banco Pastor, Confederacion Espanola de Cajas de Ahorro, Caja Rural de Granada, Bankoa, Liberbank, Ibercaja Banco, Cajamar Caja Rural, Ahorro Corporacion Financiera, Bankia, Banco CEISS, Catalunya Banc, NCG Banco, Banco CAM, Dexia Sabadell and Banco de Valencia.
AP Business Writer Seth Sutel contributed to this story.