Spain calls for early elections as market confidence erodes

Just hours earlier, Moody's credit ratings agency warned that it may downgrade Spain's government bonds by one notch to Aa3 because of the conditions attached to last week's deal on a second Greek bailout, which involves the private sector.

Even though eurozone leaders have been going to great lengths to reassure markets that making banks take a 'voluntary' cut in their gains on Greek bonds is a one-off and will not be replicated, Moody's said this set a "precedent" for other countries with high debt, such as Spain.

"The deal last week has not really rebuilt confidence across the eurozone, so Spain is still on their radar screens with costs rising," the ratings agency noted.

The yield on the Spanish government's 10-year bonds rose by ten points to 6.1 percent on Friday.

Zapatero's government recently passed fresh austerity measures in a bid to limit the budget deficit. The measures have for months been heavily contested by citizens calling themselves the "Indignants".

The protesters say the austerity drive has only led to more unemployment. Spain has the highest unemployment rate in the EU at over 21 percent. It is almost 50 percent among young people. The country's public debt is four points over the 60 percent of GDP limit allowed under eurozone rules.

Spain is one of the last outposts of a Social-Democratic government in Europe, with the centre-right having swept into power in most EU countries except for Austria, Greece and Cyprus.

In local elections held in May, Zapatero's party recorded its worst result in 30 years, suggesting that the centre-right People's Party may be set for a comeback in November, despite corruption scandals that have plagued the party.