The dismal market reaction to the euro zone's promise to pump as much as EUR100 billion ($126.5 billion) into shaky Spanish banks--underlined by the high yield the government paid Tuesday to raise short-term funds--is prompting a rethinking of the rescue's mechanics, which have heightened worries over Madrid's ability to repay its debts.

Spanish Prime Minister Mariano Rajoy relaunched a campaign to allow the euro zone's rescue fund to directly channel the aid money into the country's lenders, rather than through the governments--a demand that has previously run aground.

At the summit of the Group of 20 leading economies in Los Cabos, Mexico, Mr. Rajoy told his counterparts it was necessary to 'break the link between risk in the banking sector and the sovereign risk,' a Spanish official said.

Officials in Brussels cautioned the momentum hasn't moved in favor of making such far-reaching changes to the Spanish bank-aid plan. But they said at least one issue is back on the table: putting bank-rescue loans on equal footing with government bonds held by private investors. Germany has insisted official loans should have a preferred status, meaning they shouldn't suffer losses even if private bondholders are forced into a restructuring.

Some analysts have blamed this prospective subordination of private creditors as contributing to the retreat of Spanish bond markets since the bank-bailout plan was announced 10 days ago. Others argue investors should assume official lenders will have preferred status anyway.

The precariousness of Spain's finances was underlined Tuesday, when the country had to pay sharply higher interest rates on EUR3.04 billion in short-term debt. The yield on Spanish 12-month bills jumped to 5.07%, from 2.99% May 14, while the yield on 18-month bills rose to 5.11% from 3.3%. Although the yield on Spanish 10-year bonds slipped to 6.98% on the secondary market, it is still almost a percentage point higher than before the aid request.

The rise in rates at Tuesday's sale of bills, analysts said, is an ominous sign ahead of a Thursday auction in which the government plans to sell as much as EUR2 billion of two-, three- and five-year debt. Despite the rising borrowing costs, officials said there is no official talk of Spain asking for a full-fledged government bailout.

The Spanish bank bailout--and the wider market rout that has gripped the euro zone over the past week--will be discussed at a meeting of the bloc's finance ministers Thursday in Luxembourg. Mr. Rajoy is also meeting German Chancellor Angela Merkel as well as his Italian and French counterparts Friday, giving the leaders another opportunity to discuss the aid deal.

Spain's market troubles stem from doubts the country will be able to repay its expanding debt pile, leaving a shrinking group of investors demanding ever-higher compensation for lending it money.

The EUR100 billion now earmarked for Spain's banks is equivalent to almost 10% of its gross domestic product and would, if it is used in full, push its debt load to around 90% of GDP. While that is much lower than the debt burdens of Greece or Italy, Spain is also running high deficits, a crash of property prices doesn't seem to have reached bottom, unemployment is close to 25% and the country is stuck in a bitter recession.

The European Stability Mechanism, the new euro-zone rescue fund that is expected to come into operation this summer and is the euro zone's favored vehicle for the bailout, has preferred-creditor status, meaning it would get repaid before any other entity that lent money to Spain if the country was to default on its debts.

Analysts said it is possible the issue could be addressed by a summit in late June of European Union leaders. 'In the best case, language which makes clear that Spain's banking program would not be senior could be introduced into the EU summit's conclusions on June 28-29,' said Mujtaba Rahman, an analyst with Eurasia Group in New York.

But putting the ESM on equal footing with regular bondholders would only resolve part of the problem--assuming investors would believe a statement to that effect by euro-zone leaders, said Guntram B. Wolff, deputy director of Brussels think-tank Bruegel.

The much-bigger issue remains the country's expanding debt load, he added, for which no institution has offered a credible solution so far. Spain's demand for direct capital injections for its banks rather than lending the money first to the government is being supported by the European Commission, the EU's executive, and some other EU governments, but is still being resisted vehemently by Germany, officials said. One EU official, however, said 'it is still early days' and the exact structure of the aid hadn't been decided yet.

GABRIELE STEINHAUSER / JONATHAN HOUSE