European stock markets were sharply down Friday after finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spanish banks of up to $123-billion.

The document, signed off by the "euro group" of finance ministers following a teleconference Friday, calls for strict monitoring of the banks that receive aid. It also requires the Spanish government to present plans this month to reduce its budget deficit to under three per cent of gross domestic product by 2014.

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Demonstrators protest Spanish austerity measures in Spain yesterday. EU finance ministers approved a plan to bail out the country's banks Friday. (Associated Press)

The news did little to calm investors. The yield on market-traded 10-year Spanish government bonds rose to 7.28 per cent, according to data from Bloomberg — a record high since the advent of the single currency. That's above the seven-per-cent threshold that analysts consider the safe upper bound for faltering economies like Spain and Italy to be able to easily service their debts.   

Spain's benchmark IBEX-35 index was down almost six per cent, while in Paris the CAC-40 was off 2.1 per cent and Frankfurt's DAX shed 1.8 per cent. In Britain, which doesn't use the euro currency, London's FTSE 100 index dipped 1.1 per cent.  

The euro itself fell to a two-year low of $1.2167 US, down 113 basis points or 0.9 per cent.

"The euro group is convinced that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability," the finance ministers said in a statement.

The agreement calls for an initial disbursement of 30 billion euros ($36.9 billion) this month.

The full amount of money needed to shore up Spain's banks will not be known until September, after individual banks have been assessed.

"The aim of this program is very clear: to provide Spain with healthy, effectively regulated and rigorously supervised banks, capable of nurturing sustainable economic growth," Olli Rehn, the European monetary affairs commissioner said in a statement.

With files from CBC News