Spain's banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.

The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds.

Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks' growing bad loans, their holdings of shaky sovereign debt and the worsening economy.

Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank.

"Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising," said Georg Grodzki, head of credit research at Legal & General Investment Management.

"Their funding remains constrained and competition for deposits intense," he told Reuters.

Economy Minister Luis De Guindos told Reuters last week that all Spanish banks had met capital requirements set by the European Banking Authority under a 115-billion-euro recapitalization plan decided by European Union leaders in December.

But fund managers remain skeptical due to the slow-burning property crash. They include Mark Glazener, head of global equities at Dutch asset manager Robeco, who sold off his exposure to Spain at the end of last year. "Given the scale of over-building over all these years, the present provisioning that the banks have made does not appear to be enough," he said.

Central and commercial bankers admit that more capital may be needed with the banks facing further defaults by businesses and mortgage holders as the economy slips into its second recession in three years and unemployment is forecast to hit 24 percent this year.

"If the Spanish economy finally recovers, what has been done will be enough," Bank of Spain Governor Miguel Angel Fernandez Ordonez said on Tuesday, insisting that no talks were underway about any possible bank bailout.

However, he added: "If the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities."