Bankia, Spain's fourth biggest bank, is the first in line for state aid. Rodrigo Rato, chairman and former IMF managing director, swiftly resigned after it was disclosed the finance ministry was preparing to refinance the bank and introduce legislation to protect the balance sheets of others.
Spain, which also signalled it could dock its only aircraft carrier to save €30m a year, is already struggling to cope with an austerity drive that has pushed the jobless total up to nearly 25pc of the workforce.
Mr Rajoy insisted that any bank bail-out would not compromise the tough targets set by Brussels to reduce the budget deficit.
Peter Kenny, managing director at Knight Capital, said Spain's action was positive because "it's them taking ownership of their own issues".
Fears of a fall-out in financial markets after the election results in France and Greece were short-lived. Shares and the euro recovered after initial falls as investors reasoned any policy changes in the eurozone recovery programme were some way off.
But the turmoil in Greece produced by a backlash against a tough austerity programme and the failure of early efforts to form a coalition government heightened speculation the country would be forced out of the eurozone.
Citi's European economics team said there was a "rising risk of a Greek exit from the euro within the next 12 to 18 months."
Angela Merkel, the German chancellor, urged the Greek political parties to stick to the bail-out programme but her pleas fell on deaf ears.
Markets remain more interested in whether France's new president, François Hollande, will be able to persuade her to support policy changes that would meet demands for more emphasis on growth and economic recovery rather than austerity.
Mrs Merkel said she would welcome President Hollande with "open arms" and was willing to work with him but there was little sign she was ready to meet demands for a redrafting of the eurozone fiscal pact.
The two leaders are due to meet after Mr Hollande is sworn in next week. President Obama has offered to meet him before the G8 economic summit on May 18, when David Cameron is due to meet him for the first time.
Downing Street rejected suggestions that Britain could suffer because of the prime minister's support for former President Sarkozy.
Christine Lagarde, IMF chief executive, described the eurozone growth versus austerity battle a "false debate". She used a speech in Zurich to call for more flexibility for eurozone countries struggling to meet fiscal targets.
Thin trading in European markets exaggerated currency and share movements. The Euro STOXX 50 index dropped to a four-and-a-half month low at one stage but recovered to finish up 1.55pc. France's CAC-40 index ended 1.7pc higher, while Germany's DAX 30 index edged up by just 0.1pc.
Madrid benefited from the government's support for the banks, rising by 2.72pc, but there was no relief in Athens where the market slumped 6.7pc.
First reaction from London markets comes on Tuesday morning.
The Telegraph
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