Eight European banks have failed a test of their ability to withstand a long recession and will have to raise just 2.5 billion euros ($3.5 billion) of capital, significantly less than expected.

The European Banking Authority said five banks in Spain, two in Greece and one in Austria flunked the stress test, which made 90 lenders reveal for the first time their profit forecasts, a breakdown of their sovereign bond holdings and funding costs.

Expectations were for five to 15 banks to fall short and need to raise 10 billion euros or more in capital, prompting analysts to question how credible the test was.

It did not build in the impact of a sovereign Greek default, which most economists say will happen in some form.

With only eight banks failing and the requirement for these banks to raise 2.5 billion in capital, it wasn't the solution to restore confidence. What was needed was for more banks to fail and for more capital to ultimately be raised, said Michael Symonds, credit analyst at Daiwa Capital Markets in London.

The euro hit a session high versus the dollar and safe-haven U.S. Treasury bonds pared gains in response to the report.

What the report does provide is a much greater level of detail on banks' exposures than previously, which may allow investors to take a sharper judgment next week.

The EBA said maximum transparency would allow analysts to run their own tests and remove some uncertainty.

The banks had serious reservations.

It was not politically palatable for the tests to consider an inevitable Greek default, said Jason Karaian, economist with The Economist Intelligence Unit.

Analysts have no such qualms, and will be poring through the report and running their own tests over the weekend. These will be much tougher, and as a result there will be more failures and a larger capital shortfall.

Banks were deemed to have failed if they slid below a 5 percent core capital pass mark in the face of a theoretical slide in stock, bond and property prices during a two-year recession.

A further 16 banks passed the 5 percent mark by a small margin and will also have to take action.

Failed banks must now plug capital shortfalls by the year-end, with their home government ready to step in with taxpayers' money if needed. Lenders that scrape through the test will also be expected to shore up their capital buffers.

The nearly faileds have until April 2012.

Under a more realistic test, the actual capital shortfall is likely to be at least ten times the official estimate of 2.5 billion euros, Karaian said.

The International Monetary Fund has warned Europe it is taking too long to rebuild its banking system and has lagged repair work done in the United States since the financial crisis, while the threat of the Greek debt crisis spreading to bigger countries such as Spain and Italy has rattled investors and dragged European bank shares to a two-year low.

WHAT ABOUT GREECE?

Critics say the health check failed to reflect market expectations that Greece will default on its debt in some form, which would pile up losses for German and French banks that hold large amounts of the country's debt.

Under the test, banks would take an approximately 15 percent haircut on Greek bond holdings, while most market experts expect to see up to half the value of those bonds wiped out at some point.

The stress scenario isn't adverse enough to make the stress test really worthwhile, said Fredrik Nerbrand, global head of asset allocation at HSBC in London. It wasn't going to show that very many people had failed.

The EBA said that of the Greek sovereign debt held by the banks tested, 67 percent was in the hands of Greek banks, German banks held 9 percent and French banks 8 percent.

Greece's ATEbank and Eurobank EFG failed the stress test. Eurobank said it had no need to raise capital as measures had already been taken. It has been in talks to sell a majority stake in its Turkish unit Eurobank Tekfen.

The Spanish banks that failed were UNNIM, CAM, Catalunya Caixa, Banco Pastor and Caja 3. The Bank of Spain said no Spanish bank would need to raise capital.

Austria's Volksbanken also failed, but said it would have passed the test if the sale of its VBI arm and additional capital raising measures had been taken into account.

This third test of lenders in the European Union since the global financial crisis, which began four years ago, was billed as the toughest -- last year's gave Irish banks a clean bill of health shortly before they collapsed into state control.

(Additional reporting by Steve Slater, Alex Smith, Paul Day, Jesus Aguado, Fiona Ortiz. Writing by Mike Peacock; Editing by Erica Billingham)