The Bank of Spain said the economy contracted 0.4 percent in the second quarter, worse than the 0.3 percent of the first and after the government said Friday the recession would continue next year, instead of end with modest growth as it previously forecast.
The bad data compounds Madrid's pressing problems, chief among them how to cut an unprecedented unemployment rate of more than 24 percent while at the same time stabilising a stricken banking system and the public finances.
In morning trade, the yield -- the rate of return investors earn -- on the benchmark Spanish 10-year government bond jumped to 7.466 percent from 7.225 percent on Friday, well above the 7.0 percent danger level for long-term funding.
Borrowing costs for other struggling eurozone states were also under pressure as the debt crisis returned with a vengeance despite an EU bank rescue deal worth up to 100 billion euros ($122 billion) for Spain being finalised Friday.
The Italian 10-year bond yield jumped to 6.377 percent from 6.149 percent.
Any yield over 6.0 percent is widely seen as unsustainable for long-term funds, with 7.0 percent the level at which Greece, Ireland and Portugal had to ask for outside help from the EU and International Monetary Fund.
European stockmarkets also fell sharply Monday, with Madrid down 4.32 percent at around 0900 GMT after it slumped nearly 6.0 percent on Friday, as once again the banks posted large losses. In Italy, stocks slumped 3.06 percent.
London fell 1.54 percent, Paris was down 1.67 percent and Frankfurt shed 1.37 percent following heavy losses in Asian trade.
The Spanish government recently announced massive spending cuts and other measures to stabilise its public finances but the austerity programme seems only to have driven speculation that Madrid may need a full EU-IMF bailout.
Since the Spanish economy is much larger than those of Greece, Ireland and Portugal combined, there are growing raised concerns that EU rescue mechanisms might not be enough to cope, especially if Italy has problems too.
"Europe is definitely a drag on risk assets again this week as investors are worried that Spain's debt burden could be bigger than expected and that a full bailout may be required," said Peter Esho at CityIndex in Australia.
"The fresh tensions over the eurozone will hit risk assets," Credit Agricole CIB analysts said in a note.
The euro was similarly losing ground, trading at around two-year lows at $1.2102, down from $1.2152 in New York late Friday.
On Friday, the EU approved the bank bailout deal for Madrid but any positives were more than outweighed by news that the Valencia region was to ask the central government for financial aid.
Reports -- strongly rejected -- that Murcia might also need help jangled nerves further.
Spain last year missed its public deficit target of 6.0 percent of economic output by a wide margin, coming in instead at 8.9 percent, with the 17 regional governments, which fund education and health, largely blamed for the blowout.
Greece meanwhile moved back onto centre stage as EU and IMF officials readied for a review this week which will determine whether its struggling economy gets another cash injection to keep it afloat beyond the summer.
At stake are 11.5 billion euros in spending cuts in 2013-2014 which Greece was originally supposed to identify in June under agreements signed earlier this year and a privatisation drive that is months behind schedule.
The report will determine whether Greece will receive fresh loans of 31.5 billion euros ($38 billion) by September under its debt rescue programme.
Without this money, the Greek government will be unable to redeem maturing debt and keep up with salary and pension payments at home.