MADRID Spain's heavily indebted eastern region of Valencia said on Friday it would apply to Madrid for financial help, spooking markets and complicating central government efforts to stave off a full-blown bailout.
Separately, the government cut its economic growth forecasts for 2012 and 2013, indicatating they now expected the country to stay mired in recession well into next year.
It will use the revised forecasts as a base to draw up the 2013 budget, for which the ceiling has been set at 127 billion euros compared to 119 billion euros in 2012.
Valencia, Spain's most indebted region alongside its northern neighbour Catalonia, sought help under a 18-billion-euro (14.1 billion pounds) programme passed on Thursday and aimed at helping regional finances.
Madrid also passed on Thursday most of the measures of a new package of spending cuts and tax hikes worth 65 billion euros.
"Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis," the regional government - which needs to repay 2.85 billion euros of debt by the end of the year - said in a statement.
Spain's regions, currently shut out of international debt markets, have been pushing for months for a financing mechanism to help them find the liquidity they need to meet their financial obligations.
Treasury Minister Cristobal Montoro said after a weekly cabinet meeting that the regional funding plan carries strict fiscal criteria that beneficiaries must meet while providing regular updates on its finances.
"The Valencian government will have an obligation to meet new conditions to gain access to this liquidity," he said.
The euro fell broadly on Friday and European equities extended losses after the announcement.
Spain's 10-year debt yield hit a new record high at 7.23 percent, while the premium investors demand to hold Spanish 10-year paper rather than German benchmark debt went above 600 basis points for the first time since the launch of the euros 13 years ago.
The Spanish government said the costs of funding the country's debt are set to rise by 9.1 billion euros in 2013. ($1 = 0.8156 euros)
(Reporting by Julien Toyer and Nigel Davies; Editing by Paul Day, John Stonestreet)