Small retail clients who invested in Spain's nationalised Bankia face substantial losses, with the bank's shares temporarily suspended on the Madrid stock exchange on Thursday morning amid rumours that existing stock would be declared almost worthless.

The Frob, the country's bank restructuring fund, was forced to admit that the price it will set for swapping debt into shares at the bailed-out bank would be low – but denied reports that it would value shares at just 1 euro cent each.

Spain's Expansión newspaper had reported that the Frob had set the 1 cent level for shares that, when floated amid an aggressive marketing campaign in 2011, were valued at €3.75 (£3.23) each.

About 350,000 retail investors are thought to have bought at up to that price. A valuation of 1 cent would in effect wipe out their investments.

"The worst is going to happen," the newspaper said in an editorial. "This cold dose of reality, partly a result of the obligations acquired with the European Union when it was rescued, contrast with what has been happening to Bankia's share price." The share price fell by more than 22% after a trading suspension was lifted on Thursday morning following the media report, though it later rose again. By late in the day it was trading at €0.41 – still more than 40 times the value reported by Expansión.

Bankia asked to be rescued last year as it drowned in a sea of toxic real estate left over from a residential construction bubble that burst five years ago, leaving a million new properties unsold.

The bank took €18bn of European aid, which went via the Frob and was added to Spain's national debt.

Formed by the merger of seven provincial savings banks, Bankia was devastated – along with many of its Spanish peers – by the property market collapse, and a government-enforced clean-up of real estate exposures left it short of capital last year.

The complex recapitalisation of Bankia will see parent group BFA, now controlled by the Frob, subscribe to €10.7bn of Bankia-issued bonds that will then be converted into shares.

But the Frob insisted on Thursday that, although Bankia's debts outweighed assets by €4.2bn in December, the conversion price had not yet been fixed.

"The entity's negative valuation and its end-2012 projected results indicate that the price at which the Frob [will participate in Bankia] via BFA will entail a big reduction in the shares' nominal value," it said in a statement.

Bankia has forecast a €19bn loss for 2012.