Spanish Stocks Slide Again

LONDON—Spanish stocks tanked on continuing concerns about the country's banking sector and a plunge in domestic retail sales, even as other European markets generally rose on hopes about the U.S. and Chinese economies.

The IBEX 35 index skidded 2.3% to 6251.70, bringing its losses so far this month to nearly 11%.

Losses in the market have been accelerating in the wake of the government's decision last week to rescue Bankia, one of the country's biggest lenders, because of soured real-estate loans. Its shares sank another 16% on Tuesday as bank analysts downgraded the stock, and investors fear that other banks will also need large amounts of cash that Spain simply can't afford.

Among other lenders, Banco de Sabadell and Bankinter each dropped 4.3%.

Underscoring the country's economic problems, retail sales dropped for a 22nd consecutive month, tumbling 9.8% in April on an annual calendar-adjusted basis, as consumers reined in spending on such things as clothing and footwear.

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Repsol YPF dropped 7.2%, after the oil firm said it would slash its dividend payout ratio in an effort to conserve cash after the nationalization of its Argentine unit YPF .

Overall, the Stoxx Europe 600 index rose 0.8% to 244.30, its highest closing level in a week. Investors were encouraged by speculation of more stimulus measures to fuel growth in China as well as U.S. home prices, which broke a five-month streak of declines. U.S. stocks also were higher.

Steelmaker ArcelorMittal added 4.1% in Paris. Among miners, Evraz climbed 4.3% and Rio Tinto advanced 2.3%, both in London.

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Despite the slide in Spanish stocks, yields on the government's benchmark 10-year bond fell 0.04 percentage point to 6.41%, according to FactSet. Yields had jumped in recent days.

After European markets closed, Egan-Jones, a small U.S. ratings firm, downgraded Spain to single-B from double-B-minus and left the country on negative watch

In Italy, another country whose finances worry investors, the yield on the government's 10-year bonds jumped 0.11 percentage point to 5.76%, according to FactSet. The government sold €8.5 billion of six-month T-bills at the top end of its target range, although its borrowing costs rose.

While demand was decent for the short-term paper, analysts say that Italy's end-of-month government bond auction Wednesday may prove to be a tougher test of investor confidence.

Meanwhile, Ewald Nowotny, a member of the European Central Bank's governing council, said there are no talks of reinstating government bond purchases or providing more long-term loans to banks, according to Reuters. When asked about Spain's banking problems, he said rescuing those institutions is the responsibility of national governments.

"The real worry in the equity space now is the actual need for capital in Spanish banks. Bankia needs €19 billion, but there are a lot of banks in Spain and the clarity as to what they need in terms of capital in order to stay solvent is currently not present," said Christian Tegllund Blaabjerg, chief economist at FIH Erhvervsbank.

Among other national benchmarks, France's CAC-40 gained 1.4% to 3084.70, Germany's DAX rose 1.2% to 6396.84 and the U.K.'s FTSE 100 index advanced 0.6% to 5391.14. Italy's FTSE MIB added 0.3% to 13107.13.

Write to Sara Sjolin at sara.sjolin@dowjones.com