Ratings agency Moody's cut Spain's sovereign debt rating one notch to on Thursday, warning of potential further cuts because it fears bank restructuring will likely cost more than twice what the government expects.

(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government's current projections, it said in a statement.

The ratings agency said the overall cost was likely to be nearer to 40 to 40 billion euros, double the government's estimate, adding that in a more stressed scenario recapitalization needs could rise to around 110 to 120 billion euros.

The euro fell to session lows against the dollar on the news, as the ratings agency cut the rating to Aa2 from Aa1 and cast doubt on the government's ability to sustain stable long term finances. The spread on Spanish 10-year debt versus its German counterpart widened 9 basis points on the day to 232 bps.

This is clearly negative. I'm not sure up to what point, but it will certainly impact the banks. Obviously the direct consequence is that it will be harder and more expensive (for banks) to access financing, said Juan Rodriguez Rey, an analyst at Banco Sabadell.

Moody's also noted that 9 of the country's 17 autonomous regions breached budget deficit targets.

This casts doubts over the ability of the central government to exercise sufficient control over the regions to ensure compliance with deficit targets, it said.

(Reporting by Elisabeth O'Leary; editing by Judy MacInnes)