BEIJING—China said local governments owe debt equal to more than a fourth of the country's economic output, the first time Beijing has put a number on such debt, fueling fears banks could again face mountains of bad loans and underlining the limits Beijing faces as it battles inflation.

The National Audit Office said Monday that local-government debts total some 10.7 trillion yuan ($1.65 trillion), or 27% of China's gross domestic product last year. The report Monday was billed as a comprehensive tally of such debt, much...