Spain's Ministry of Economy and Finance said late Wednesday, May 9, that the bank restructuring fund, Fondo de Reestructuración Ordenada Bancaria, or FROB, will convert €4.5 billion ($5.8 billion) of preference shares in Bankia's parent company, Banco Financiero y de Ahorros, into voting shares, leaving it with a controlling stake in both the parent company and Bankia.

"The entry into the capital is considered a necessary first step to ensure solvency, the tranquility of depositors and to dispel the market's doubts about the capital needs of the entity," the Economy Ministry said in a statement. "No creditor of the entity, including depositors and the holders of preference shares will be harmed by the decision."

The nationalization of Bankia is a highly visible blow to earlier efforts to secure the Spanish banking sector by forcing smaller regional lenders to merge. Bankia was formed in late 2010 through the merger of seven regional savings banks, the largest of which was Caja Madrid.

The government said that it planned to restructure Bankia by selling assets, noting that it would provide capital "that is strictly necessary." Analysts have suggested that it will have to inject about €10 billion of additional cash to boost the bank's liquidity to compensate for expected write-downs in its loan book value.

Spanish Prime Minister Mariano Rajoy had earlier promised that state money would not be used to bail out banks but appears to have changed his mind after Spanish debt and equity markets fell in recent weeks on fears that Spain would not act decisively to shore up its banks.

Rajoy is expected to tell Spain's banks on Friday that they must be more transparent about potential losses on their books by extending write-downs beyond their property portfolios. The market will welcome improved clarity regarding Spanish bank finances, but the move has also sparked fears that other banks may need assistance and that the government may need to raise debt to meet its banks needs.

The yield on benchmark Spanish 10-year bonds was at 6.06% on Wednesday, up 28 basis points on the day, edging closer to the key 7% mark, a level that is generally considered to be unsustainable.

Madrid- and Valencia-headquartered Bankia has long been viewed as the Achilles' heel of Spain's fragile banking sector due to its roughly €38 billion of loans to the country's troubled real estate sector. Banco Financiero y de Ahorros, or BFA, owns just over 45% of Bankia and also houses much of its subsidiary's worst-performing loans, which were moved to the parent company last year ahead of the Bankia share sale in July.

The state's preference shares in BFA had an annual rate of interest of 7.75% and were due to mature in 2015.

The government's announcement on the nationalization of Bankia came three days after the lender announced that its chairman, Rodrigo de Rato, will quit his role to be replaced by José Ignacio Goirigolzarri Tellaeche, a former CEO of Spain's No. 2 bank, Banco Bilbao Vizcaya Argentaria SA.

Bankia shares traded Thursday morning at €2.073, down €0.057, or 2.67%, on their previous close. The bank's stock had already fallen 5.8% on Wednesday and is down 71% over the past year.