Spanish banks skidded deeper into a credit crisis on Friday as world leaders headed to the United States to try to prevent a Greek-driven eurozone catastrophe.
With a growing sense that the Greek crisis was spiralling out of control, volatile trading gripped Madrid, in particular, with troubled Bankia soaring more than 23 percent only a day after it plummmeted more than 14 percent.
Spanish banks reported doubtful loans had climbed to 147.968 billion euros ($188 billion) in March, equal to an 18-year record 8.37 percent of the total, central bank data showed.
But despite those figures, and just hours after Moody's downgraded 16 Spanish banks by one to three notches owing to a Spanish recession and the state's financial woes, Spanish bank stocks rallied.
Bankia, which plunged the day before on rumours of a bank run, surged 23.49 percent by the close while Spain's number-one bank Santander gained 2.97 percent and rival BBVA climbed 3.69 percent.
Just nine days earlier, Madrid announced it was taking over Bankia to salvage a balance sheet with problematic property assets amounting to 31.8 billion euros.
Pablo del Barrio, analyst at Spanish brokerage XTB Broker, said Bankia stock had been subject to speculation in past days and investors may now be anticipating a government clampdown to stop short-selling.
Germany tried to shore up confidence, meanwhile.
"We currently have no reason to doubt ... that Spain will manage to overcome the crisis with its own means," German finance ministry spokeswoman Silke Bruns told a news conference in Berlin.
Spain's recession, made more painful by austerity measures aimed at reining in public debt, and a jobless rate above 24 percent, cut the appetite for imports and had a positive impact on its trade accounts.
The trade deficit fell by 29.4 percent in March when compared with the same period a year earlier, with exports edging up 1.2 percent and imports slumping 4.6 percent, official data showed.
The prospect of Greece exiting the eurozone hung over the region, however, after voters rejected austerity in a deadlocked May 6 poll. Politicians failed to form a government, and Greeks must vote again June 17.
A Greek rejection of spending cuts could scupper a European Union-IMF bailout package worth 237 billion euros ($300 billion) and, officials have warned, lead to its exit from the eurozone.
US President Barack Obama is to raise actions Europe could take on its debt crisis at a Group of Eight summit in Camp David starting Friday, as Washington seeks more growth-oriented policies.
XTB's Del Barrio argued that the market storm could be calmed by measures to prevent investor speculation and by strong European Central Bank action to increase liquidity.
"People are waiting for this weekend's G8 meeting -- to see if we can extract from it some kind of strong action by the central banks, and especially the European Central Bank," Del Barrio said.
In one positive development for Spain, Fitch Ratings welcomed the central governments of the powerful regions' plans for curbing spending and getting their public deficits under control.
"Nevertheless, in the current economic context we consider that there is a risk that potential reforms might have a limited impact on 2012 accounts," Fitch said in a report.
Spain's government has vowed to lower the overall public deficit from 8.5 percent of output last year to 5.3 percent this year and 3.0 percent -- the European Union limit -- in 2013.