A eurozone bailout for Spain's banks and a tough batch of pay cuts and tax hikes have not been enough to save the country from the risk of a full-blown bailout, analysts warn.

Squeezed between public outrage at its austere economic reforms and pressure from European authorities to strengthen its public finances, the government has run out of ammunition.

Hundreds of thousands of Spaniards took to the streets on Thursday in the biggest of a string of angry anti-austerity protests.

On Friday, the stock market plunged 5.8 percent and sovereign interest rates rose to dangerous levels, despite the eurozone's approval for a credit line of up to 100 billion euros ($122 billion) to save the banks.

Spain has entered a 'death spiral' with its rising financing costs complicating its efforts to pay off its debts, according to Rabobank analyst Richard McGuire.

Analysts at consultancy Capital Economics warned: "With the outlook for Spain's public finances still closely tied to that for its banking sector, there remains a strong risk that the Spanish government will need its own bailout."

Spain is due this month to become the fourth eurozone country, after Greece, Ireland and Portugal, to get bailout funds in the crisis after the eurozone Friday approved the aid for Spanish banks on Friday.

Despite this, the return on Spanish 10-year bonds jumped above the 7 per cent danger level and another key measure, the difference between the yields on Spanish and safe haven German bonds, topped 600 points.

"This is surprising, especially considering the recent package of savings measures ... and the definitive validation of the bank bailout," wrote Daniel Pingarron, a strategist at IG Markets trading group.

"A large number of investors think that the possibility of a break-up of the euro is rising."

The Madrid stock exchange plunged by 5.8 per cent Friday, after one of Spain's indebted regional authorities, Valencia, reached out for aid from a 18-billion-euro central government fund for struggling regions.

The markets have defied Spain's latest deficit-cutting measures, passed by parliament on Thursday: 65 billion euros ($80 billion) in fresh austerity measures including cuts to pay and unemployment benefits.

"Front-loaded austerity is likely to deepen and prolong the recession," wrote Christian Schulz, an analyst at German bank Berenberg, in a report.

"Unemployment may rise further in the short-term, increasing the risk of a political backlash."

Without better economic news, "Spain may risk losing market access" for borrowing to finance its day-to-day operations, he warned.

On Friday the Spanish government cut its economic growth forecast for 2013 from 0.2 per cent growth to a contraction of 0.5 per cent. Unemployment is at more than 24 per cent.

Analysts at financial group Citi forecast a much harsher contraction of 2.1 per cent in 2012 and 3.1 per cent in 2013.

Pingarron saw the risk of a full bailout for Spain as still relatively remote, however, due to its formidable cost, estimated at about half a trillion euros overall.

Compared to Spain, which accounts for 12 per cent of the gross domestic product in the eurozone, the three countries already bailed out are small, making up six percent of eurozone GDP between them.

"A full bailout for Spain and its contagion to Italy would be unfeasible for the eurozone and everyone knows it," Pingarron wrote in a note.

"So although its seems an obvious solution, it doesn't seem close to happening."

Spain insists the European Central Bank (ECB), which in December and February offered loans at ultra-low rates to banks to ease liquidity, must step in again with further measures to break the vicious circle.

"The moment of truth for the ECB, where it may be forced to step in decisively, could be approaching more quickly," wrote Schulz.