The chances of Spain overtaking broken Greece to become the new flashpoint for the wobbling eurozone rose this morning after the European Central Bank reportedly rejected the 19 billion euro bailout of Bankia, Spain’s biggest and most indebted bank.

The Financial Times reported on its website that the rejection means Spain will have to come up with a new plan, and could be forced to do what it doesn’t want to do: approach credit markets for some or all of the bailout funding. That fear saw yields on the country’s 10-year bond jump to a nasty 6.49% overnight after they topped 6.5% on Monday.

There are worries Spain is headed down the route that dragged Ireland into a bailout through the government’s botched handling of a huge pile of bad property loans held by the country’s banks. The Spanish government seems to be engaged in a game of bluff with the ECB as it tries to get it to start buying Spanish sovereign debt, a move that would allow the recapitalisation of the banks, but which would breach the ECB charter and enrage Germany’s Bundesbank, which is the dominant national central bank in the eurozone.

But if such a deal could be agreed to, it would end much of current tension and fears about Spain, the euro and the stability of the eurozone. Such a move seems a long way off.

The FT reported that the ECB said Spain’s plan to use 19 billion euros ($24 billion) in sovereign bonds to recapitalise the bank was in danger of violating a ban forbidding the central bank to finance governments. The report came as markets in Asia opened for trading Wednesday morning, looking to build on a solid night in the US, and more reports leaking from China of a new stimulus package. But the news about Spain helped push markets in Australia and Japan down from the opening.

And the growing crisis in Spain will offset any news from China if the country’s government doesn’t come up with a new and credible plan to bailout Bankia and steady the country’s already wobbling banks. That includes the highly-rated Santander, the biggest of the country’s banks and has operations in the UK, other parts of Europe and through South America. While solidly capitalised, Santander is a one-bank contagion chain if markets really lose faith in Spain, its governments and the banks.

Spain nationalised Bankia earlier this month with the cost then estimated at 4 billion euros, with perhaps another 6 billion in fresh help on top of that. Now that extra funding has reached 19 billion, making 23 billion in total. The Spanish government doesn’t have that money.

Spain had planned to finance this by injecting the new capital in the form of sovereign bonds into Bankia, then swapping them out for cash at the ECB’s three-month refinancing window. That would have allowed the country to sidestep having to raise the money in the jittery bond markets. Now it may have no option but to try this, and failing them, to ask for a bailout for Bankia, and possibly other banks from the European Stability Mechanism (the so-called financial firewall).

Bankia shares closed down more than 16% overnight Tuesday, after the 13% slump on Monday in the wake of the 19 billion euros plan late last Friday night (after trading had finished in Europe for the week).

Earlier the small Egan-Jones Ratings Co. downgraded Spain’s credit rating to B from BB- with a negative watch, which saw the euro fall under $US1.25. That was ignored by US markets.

The ratings agency said Spain has a higher-than-average exposure to its banking sector with its top five banks owning assets equal to 204% of GDP compared with 125% in Germany.

“Spain will be expected to provide substantial financial support to its banks over the next couple of quarters because of declines in home values, austerity measures and increased unemployment although affording such support might be difficult,” Egan-Jones said in a statement.

That’s as good a summary of the problems confronting Spain and the government as it grapples to come up with a credible plan for handling Bankia and other stricken banks which together hold around 180 billion euros of dodgy property loans.

Adding to market worries was the news from the Bank of Spain that its governor, Miguel Angel Fernández Ordóñez, would step down at the end of next week, a month earlier than planned. The explanation was to allow his successor a clean slate to tackle the problem. But the FT and Reuters say he has also been the focus of growing attacks from politicians over his failure to prevent the country’s banking crisis.