BERLIN – Europe's debt crisis mushroomed Wednesday as Spain saw its credit rating lowered, just as Germany sought to reassure nervous investors that Greece would not be allowed to go under, saying Berlin's share of a key aid package could be approved in the next few days.

Stock and bond markets had begun to regain their composure after stinging downgrades of Greece and Portugal the day before, when Standard & Poors delivered more bad news by cutting Spain's rating to AA from AA+ amid concerns about the country's growth prospects following the collapse of a construction bubble.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poor's credit analyst Marko Mrsnik said.

'It feels like when the run on the banks started,' warns one City bond trader

City traders are counting the cost of a tumultous two days of activity as Greece's sovereign debt problems threatened to mushroom into a wider financial crisis.

"The mood in here is not quite as bad as it was after Lehman Brothers went under, but that's hardly a reason to celebrate," said one City bond trader. "But there's the same sense of not knowing how bad the contagion might get: sterling's taking a battering, bond spreads are widening dramatically, gold's flying again as investors flock to safe havens and bank lending across the EU is constricting, raising fears of another credit crunch."

Shares in UK lenders slide amid fears of renewed credit crunch but French, German and Swiss most at risk from Greek default

Fears of a fresh banking crisis stalked the markets today as the risk of Greece defaulting on its debt repayments raised concerns about the exposure of major banks to indebted countries in Europe.

As analysts estimated that Britain's banks have a combined exposure of £100bn to Greece, Portugal and Spain – the three countries causing most concern on the financial markets – the Financial Services Authority was closely watching the markets and assessing exposures to the vulnerable countries.

Analysts at Credit Suisse calculated that UK banks had £25bn of exposure to Greece and Portugal but £75bn to Spain, where the collapse in the property market has already forced banks such as Barclays to admit to bad debt problems and left Royal Bank of Scotland facing questions about its exposure.

Much of the anxiety was targeted at French, German and Swiss banks. Howard Wheeldon, of BGC Partners, said: "If Greece defaults that means the pressure will then be felt and exerted on national banks that hold the Greek debt. That includes very many German, French and Swiss banks and it just may be that with so many banks involved one of these might just go down."