Standard & Poor's cut the credit ratings of 10 Spanish banks on Thursday and said they remained on watch for a possible further cut subject to a review of Spain's sovereign rating.

The banks include Bankia and its holding company, CaixabankMC> and its holding company, Ibercaja, Bankinter , Sabadell and Popular

.

S&P said the cut came after it applied new ratings criteria and updated its group methodology for banks. The criteria were changed in November to increase clarity regarding hybrid capital instruments.

Spanish banks are heavily exposed to bad, and potentially bad, loans after a prolonged housing bubble burst in 2007, and risks remain even after prolonged restructuring and recapitalization.

The economy is stagnant, the banks are depending on the European Central Bank for liquidity, and many of them must raise more capital as well.

The incoming government of centre-right leader Mariano Rajoy -- due to be sworn in as prime minister on Wednesday -- is planning a fresh overhaul of the banking sector, possibly creating a holding company for toxic real estate assets.

S&P this month put sovereign debt from the entire euro zone currency bloc on review for possible downgrades due to the deepening economic and credit crisis in the region.

The agency said on Thursday that within four weeks of deciding on whether or not to downgrade Spain's government debt, it will announce decisions on possible further cuts in the ratings of Spanish banks that are on review.

Spain's sovereign debt is currently rated AA- by S&P, an investment grade that indicates a very strong payment capacity.

(Reporting By Fiona Ortiz; Editing by Will Waterman and David Hulmes)