The Bank of Spain said on Saturday that it has taken over CajaSur, a Spanish based savings bank.
Spain injected 550 million euros into the bank, which lost 596 million euros in 2009.
The euro is down sharply across the board on the news, indicating the nervousness of markets, even though CajaSur is a small bank.
CajaSur represents just 0.6% of the Spanish banking system. Based in southern Spain, the savings bank was owned by the Catholic Church with priests on the board of directors who had resisted a takeover that meant heavy layoffs. The bank holds huge quantities of underwater mortgages.
The rescue news prompted a sell off in Spain of bank stocks BBVA is down -2.77%, Banco Santander is down, -2.48%, d Banco Popular is down -2.52%,Banesto is down -1.68% and Sabadell is down -2.66%.
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