MADRID (AP) — Confidence in Spain‘s banks and its teetering economy was shaken Thursday after a newspaper reported that depositors were rushing to withdraw their money from Bankia, a troubled bank that was effectively nationalized just one week ago.

Adding to the anxiety, rating agency Moody’s downgraded its credit ratings on Spanish banks. The banking sector has been hit hard by a collapse in the Spain’s property market and is facing tough funding rules that many analysts fear it can’t afford.

The nervousness about Spain’s banks comes as the eurozone financial crisis intensifies. Political turmoil in Greece has increased the likelihood that it could leave the 17-country monetary union, a move that could have ripple effects throughout Europe and the world’s financial markets.

Depositors have been pulling their funds out of Greek banks. People fear the country’s financial sector might collapse if Greece left the eurozone and that their savings would become worthless if the country started using a substantially devalued new currency, such as the drachma.

Bankia SA, the country’s fourth-largest lender, saw its shares fall as much as 27 percent during trading in Madrid after the El Mundo newspaper reported the bank was hit with more than €1 billion ($ 1.27 billion) of withdrawals since the government announced the takeover. The amount taken out by bank customers is equivalent to all withdrawals made from Bankia in the first three months of the year, the paper said.

Bankia insisted its depositors’ money was safe, while the government denied there was a run on the bank. According to the company’s latest earnings statement, total resident private sector deposits were €125 billion as of the end of the first quarter. The bank is heavily exposed to the country’s collapsed property market, with €32 billion in problem loans.

Jose Ignacio Goirigolzarri, chairman and chief executive of Bankia, moved to reassure investors.

“In these turbulent economic times, I must say that Bankia’s activity over these past few days has been basically normal,” Goirigolzarri said. “It has been basically normal. I think it is important to point this out, just as I think it important to note that our customers should feel very confident and very sure because Bankia is a tremendously solid institution.”

In a further statement, the company said that when the government nationalized Bankia on May 9, it established that the bank was solvent and said its depositors had nothing to worry about.

Nonetheless, the newspaper report sparked a sell-off of Spanish bank shares. Banco Santander SA, Europe’s biggest bank by assets, fell 1.7 percent while shares in Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest lender, dropped 2.8 percent. Bankia shares recovered in afternoon but closed down 14.1 percent lower at €1.42 each.

Moody’s Investor Service’s downgrade on Thursday of 16 Spanish banks is bound to further rattle investors. The agency said it took the action because the banks face a rising tide of bad loans with Spain’s economy again in recession, its real estate market a shambles and its unemployment rate stubbornly high.

The country’s banking sector is further threatened by its exposure to the Eurozone debt crisis.

Investors worry that a messy Greek exit from the eurozone bloc could further destabilize Spain’s financial sector. The concern is that the banks might not be able to meet tough new capital defense requirements and need bailouts if concerns about their stability worsen.

The government, meanwhile, risks requiring a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with unemployment of nearly 25 percent and austerity measures draining money from the economy.

Concerns over banks’ exposure to the eurozone’s debt crisis once again slammed Europe’s financial sector over the past week. The political vacuum in Greece following the inconclusive election result nearly two weeks ago has led to an increase in funds being drawn from the country’s banks.

Greek president Karolos Papoulias warned party leaders during unsuccessful coalition talks that about €700 million ($ 898 million) in deposits have flown out of Greek banks since the May 6 elections, according to a report from Greece’s central bank governor, George Provopoulos

“The situation in the banks is very difficult,” Papoulias said according to a transcript of the meeting’s minutes released by his office. “Mr. Provopoulos told me that of course there is no panic, but there is great fear which could turn into panic.”

Fitch ratings agency on Thursday downgraded Greece by a notch to the lowest grade for a country that is not in default, citing the risk that the country may leave the eurozone if the next elections do not produce a government that supports the bailout.

Earlier this week, rival agency Moody’s downgraded the debt ratings of 26 Italian lenders as they struggled with the effect of the country’s weak economy and government austerity measures. The move means Moody’s now ranks Italy’s banks lower than most of their Western European peers.

Meanwhile Spain’s Treasury on Thursday managed to sell three kinds of bonds, two maturing in 2015 and one in 2016, for a total of €2.5 billion ($ 3.18 billion). For the three-year note, the only one which was comparable to previous sales, Spain’s borrowing rate — or yield — rose to 4.87 percent, from 4.04 percent in a similar auction on May 3.

On the secondary market, where issued bonds are traded freely, the interest rate on Spanish 10-year bonds stood at a worryingly high 6.29 percent. It has risen sharply from below 5 percent in March and is edging toward the 7 percent mark that is considered unsustainable in the longer term. Greece, Ireland and Portugal sought bailouts when their 10-year bond yields remained stuck above that level.

Prime Minister Mariano Rajoy warned this week that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.

After Spanish markets closed Thursday, Moody’s announced that it had downgraded the credit ratings of four of Spain’s 17 semiautonomous regions that function much like U.S. states. Overspending and debt accumulated by these regional governments has added to the country’s economic problems.

Spain’s government on Thursday approved new budget-cutting plans for 16 of the regions, and the country’s National Statistics Institute confirmed that Spain went into recession again for the second time in three years. Gross domestic product declined 0.3 percent in the first quarter that ended in March.

___

AP Business Writer Alan Clendenning contributed from Madrid.