Portugal's caretaker government said on Wednesday it needs financing from the European Union, marking a turnaround after resisting asking for aid for months despite sharply deteriorating financial conditions.

Portugal's situation worsened last month after the government resigned, sending bond yields soaring, sparking a series of rating downgrades and a warning by local banks that they may no longer be able to buy government debt.

In this difficult situation, which could have been avoided, I understand that it is necessary to resort to the financing mechanisms available within the European framework, said Finance Minister Fernando Teixeira dos Santos.

Prime Minister Jose Socrates was due to make a statement at 1900 GMT.

It was not immediately clear from the finance minister's comment whether he was referring to a short-term loan to secure financing until a June 5 snap general election or a fully-fledged bailout like those received by Greece and Ireland.

Portugal's cost of credit has leapt since the minority Socialist government quit last month after a parliamentary defeat on tougher austerity measures, casting the country into political limbo.

Earlier on Wednesday, the country issued 1 billion euros in treasury bills. The finance ministry said the auction was a confirmation of the deterioration caused by the rejection of the austerity measures.

The government has held out hope previously that by steadily meeting budget goals and cutting spending it could regain investor confidence and avoid a bailout.

In the latest threat to the government's resistance to seeking foreign financing, local banks warned the government on Monday that it must seek a short-term emergency loan to soothe market concerns ahead of the election, saying that under current conditions they cannot continue buying government debt.

There has been a very important signal from the banks for the future, said BNP Paribas analyst Ioannis Sokos. Portugal can still make it through April, but probably won't get to June without a bailout.

(Additional reporting by Shrikesh Laxmidas, Sergio Goncalves, Filipa Lima and Elisabete Tavares; Writing by Axel Bugge, Editing by Louise Ireland)

Portugal BNP Paribas