The biggest bank in the euro zone in terms of market value, Banco Santander said net profit dropped 8.5 percent to 8.181 billion euros ($11.3 billion) in 2010.

New Bank of Spain rules had obliged the 154-year-old institution to put aside a 487-million-euro precautionary reserve in the third quarter for loans that might not be recovered, it said.

Without these new rules, net profit would have slipped by only three percent.

Spain's government is fighting to dispel market fears over the bad debts that piled up in its banking industry, which loaned heavily in the now-collapsed housing boom.

Regional savings banks responsible for about half of all loans in the country are the biggest concern. But the government has tightened up the balance sheet rules across the industry.

The 154-year-old Banco Santander said its net profits had now exceeded eight billion euros for four years running.

"This consistency was achieved in the worst economic context in several decades and is due in large part to the geographical and business diversification of the group," it said in a statement.

While suffering a 23-percent drop in net profit in continental Europe, the bank enjoyed a 25-percent profit surge in Latin America, a 31-percent leap in Brazil and an 11-percent gain in Britain.

Santander's US subsidiary, Sovereign, emerged from the red, turning a loss of $35 million in 2009 into a net profit of $561 million (424 million euros) in 2010.

And worldwide, net banking income rose 11.1 percent to 29.224 billion euros, said the bank, which boasts 90 million clients and 13,660 offices.

"We achieved results that again place us among the leaders of world banking," Santander executive chairman Emilio Botin said in a statement.

"Banco Santander has had another excellent year."

Banco Santander said it strengthened its balance sheet in the year by making total provisions for possible insolvencies of 10.258 billion euros despite the number of delinquencies declining.

The ratio of non-performing loan to total assets rose from 3.24 percent to 3.55 percent, it said, but 73 percent of these loans were covered by money set aside in provisions.

The level of core capital -- equity capital and retained earnings -- rose to 8.8 percent of total assets from 8.6 percent in 2009, the bank said.

Spain now requires listed banks to have a core capital level equal to 8.0 percent of total assets, even stricter than the 7.0 percent required under tough new, international "Basel III" rules agreed last year.

For the fourth quarter of 2010 alone, Banco Santander outperformed market expectations.

Net profits dipped 4.6 percent from a year earlier to 2.101 billion euros in the final quarter, it said. Among 11 analysts polled by Dow Jones Newswires, the consensus forecast had been for a profit of 1.96 billion euros.

Net banking income climbed 7.5 percent to 7.329 billion euros over the same period, beating the consensus forecast of 7.25 billion euros.