Image caption Spain has been blighted by the highest unemployment rate in Europe

Three Spanish savings banks - Ibercaja, Liberbank and Caja3 - have approved a merger to strengthen their weakened balance sheets.

The merged bank would create the country's seventh biggest lender, with 120bn euros (£96bn; $151bn) in assets.

Spain's government has asked its banks to set aside nearly 84bn euros to cover bad debts.

The merger comes after Bankia, itself made from a merger of banks, needed another bailout.

After the merger, Ibercaja will account for 46.5% of the new bank, while Liberbank will have 45.5% and Caja3 will get 8%, according to statements to the Spanish financial markets regulator, CNMV.

The difference between German and Spanish bond yields have also hit a new high, as investors lose faith in the Spanish economy and flee to safety.

German 10-year bond yields fell to 1.347% while Spain's rose to 6.5%. Spanish shares were also lower.

Investors are worried about the amount of bad loans Spanish banks could be holding and how the government can afford to keep bailing out the struggling financial sector.

The Bank of Spain has predicted that the recession will continue in the second quarter of 2012.

"Available indicators for the second quarter are still scarce but they do anticipate that activity will continue contracting in this period," the central bank said.

Last week, Bankia, Spain's fourth-largest bank, asked the government for a bailout worth 19bns euros.

Bankia also restated its results, saying it had made a 2.98bn-euro loss for 2011 rather than the 309m euros in profit it announced in February.

Regional loans

There was more pressure on Spanish debt after news that the government planned to approve a scheme on Friday that would allow Spain's 17 regions to borrow money using joint government-backed bonds.

The hispanobonos are designed to make it cheaper for the regions to borrow.

"The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," an economy ministry spokeswoman said.

One of the regions, Catalonia, appealed for central government help last Friday.

The difficult state of the country's finances was underlined by the latest retail sales figures, also released on Tuesday by the National Statistics Institute.

Spanish retail sales dived in April, showing the biggest fall since the figures started being collected in 2003.

Sales fell 9.8% last month compared with the same month last year, after adjustment for calendar differences.

The fall was much worse than had been expected, and marked the 22nd consecutive month of declining sales. Sales had fallen by 3.8% in March.

Without adjusting for calendar effects, retail sales fell 11.3% in April having dropped 4% in March.

Spanish shoppers are struggling because of government austerity measures, rising taxes and Europe's highest rate of unemployment.

Employment in the retail sector was down 1.2% in April from the same month in 2011.

Overall, the unemployment rate in Spain is more than 24%.

Bad debts

The Spanish government is requiring its banks to set aside an extra 30bn euros to cover bad debts resulting from the collapse of its property sector.

This comes on top of the 53.8bn euros already allocated in February.

The Spanish property crash has forced a wave of mergers upon the Spanish banking sector as it seeks to shore itself up against the bad debt mountain.

Caja3 is the result of a three-way merger of regional savings banks. Liberbank emerged after a four-way merger.

Bankia was formed after seven banks merged.

Another bank, Banco Popular, announced on Tuesday that it was in talks to sell its online banking business in an effort to raise cash.

Its debt has been downgraded to junk-bond status.

Prime Minister Mariano Rajoy admitted on Monday that the country was struggling to borrow money but insisted that his country would not need to ask for a bailout from the EU.