Spain's borrowing costs have spiked to 7% - so-called bailout territory - as fresh crisis threatens to descend on the fourth biggest country in the eurozone.
Investors can now demand a 7% return on 10-year bonds, an 'unsustainable' rate of return according to many analysts.
The country's borrowing costs are now at their highest since Spain joined the euro in 1999, and at the same level at which Greece, Ireland and Portugal sought a government bail out.
The critical increase came as ratings agency Moody's downgraded Spanish banks three notches to one above 'junk status', a decision which reflects Moody's scepticism in Spain's ability to repay its debt.
Moody's downgrade to Baa3 from A3 followed an offer of 100 bn euro from EU leaders to prop up Spain's floundering financial sector.
Although it offered a temporary boost to the economy, the ratings agency believes this will only further burden the country's ailing financial sector and has threatened to further downgrade Spain's rating over the next three months.
Similarly the soaring yield shows investors have little confidence in Spain's ability to repay its finances and were not convinced that the banking bailout offers hope for the country's beleaguered financial sector.
Higher borrowing costs make it even more difficult for the financially beleaguered government to find the money to pay investors and repay their debt, as the nation finds itself spiralling increasingly into the red. Its troubled financial status make it an unattractive option for investors, cutting off another potential source of funds.
As Greece heads to the polls on Sunday, many fear the country could vote for an anti-austerity party like Syriza which could ultimately lead to Greece leaving the euro, a result that could have cataclysmic knock-on effect on the value of the currency. Wins for pro-bailout groups will see years of harsh spending cuts imposed on its people to exit the eurozone.
The ongoing crisis weighed on equity markets with the FTSE 100 Index in London falling nearly 1%, while Germany's Dax and the Cac-40 in France also fell into the red.
In the UK, an over-subscribed debt auction on bonds running until the year 2060 raised £1.5 billion, with investors demanding an interest rate of 3.2%.
Meanwhile, Italy saw its borrowing costs rise at a debt auction.
The country paid 5.3% interest rates on three-year bonds, up from 3.91% last month. However, the sale was fully subscribed showing good demand for Italy's debt.
Chris Beauchamp, market analyst at IG Index, said: "Spain and Italy might not be Greece, but neither are they Germany, and everyone is rightly worried that both nations are headed towards bailouts of the kind seen in Greece and elsewhere."
Spain's economic woes can be traced back to the late 1990s when the country joined the euro and its banks, property developers and ordinary home-buyers took advantage of low interest rates and effectively fuelled a huge property bubble.
Property prices nearly tripled until the financial crisis hit in 2007 and the bubble burst.
The construction industry collapsed, leaving hundreds of thousands out of work with struggling households facing financial difficulties and banks hit by mounting mortgage debts.
The government now finds itself borrowing and spending at record levels to keep the economy in check which is increasingly challenging as the jobless rate has hit 24%, meaning less income tax receipts and higher welfare bills.