Spain is finalizing plans to find fresh funds for its troubled savings banks, officials said, prompting speculation the government may have to spend more while fighting to slash a massive deficit.

Madrid hopes the regional banks can raise the capital -- which the sources denied would reach the 30 billion euros ($40.47 billion) cited in a newspaper report -- from private investors. No private capital deals have yet been struck.

Spain will have to raise more capital in the money markets to shore up a banking system heavily exposed to a collapsed property market, economists say. The regional banks are at the heart of concerns Spain may seek an Ireland-style bail-out.

The recapitalization will have to be done, and to a large extent be absorbed by the government, said Antonio Garcia Pascual, analyst at Barclays Capital.

The government will announce details of the recapitalization plan once the savings banks have laid out their full exposure to Spain's collapsed property sector in coming weeks, a government source said on condition of anonymity.

Ratings agency Fitch maintained a negative outlook on Wednesday for Spain's regional savings banks. Most medium- to small-sized savings banks are rated in the 'BBB' range.

Spain is whittling down one of the euro zone's largest public deficits through broad spending cuts, but economists fear a potential capital shortfall in the savings banks and poor regional government finances could scupper its efforts.

The economy ministry says the regions have met their deficit targets for 2010. But the biggest regional government, Catalonia, said it would cut 2011 spending by 10 percent after missing its deficit goal last year and being cut off from fresh borrowing, daily El Pais reported on Thursday.

Spain's risk premium over benchmark German debt narrowed on Thursday, building on recent optimism over long-term changes to the European rescue fund (EFSF). It fell 11 basis points to 216 bps, its lowest level since mid-November.

Ben May, an economist at Capital Economics, said regional administrations would have to sign up to Spain's austerity program, though there would be a price to pay for Madrid.

The regions are going to have to make some stringent cuts, with all the political kickbacks that implies, he said.

MORE CASH FOR BANKS

The Wall Street Journal said earlier on Thursday the government is planning to raise more than 30 billion euros in state-backed funds for a recapitalization of the savings banks, citing sources familiar with the matter.

Arturo de Frias, head of bank research at Evolution Securities, said the savings banks could need 40-50 billion euros more capital to plug losses from soaring property debts.

Economy Minister Elena Salgado said earlier this week the banks would need further capital beyond the 11 billion euros already spent on bolstering their finances, but not at the levels cited by the newspaper.

Asked about whether the banks would need between 30 and 80 billion, Salgado said: The first government estimates are a long way from that figure.

A reform of the savings bank sector has opened the doors for them to seek new capital from private investors, though they have struggled to drum up interest and are planning to extend a roadshow from Europe and the United States to Asia.

The unlisted savings banks account for around half Spain's financial system and were badly hit by a burst property bubble.

The government has made soft loans available to the sector through its restructuring fund (FROB), which would have to raise more money from the markets if the banks still need cash after seeking private capital.

The governor of the Bank of Spain said in December the banks would not need to turn to the FROB this year.

Spain's borrowing costs have soared over the past year and it has been under intense market scrutiny since Ireland was forced to take an 85 billion euro aid package from the European Union and International Monetary Fund at the end of last year. Some 35 billion euros of that was ringfenced to prop up Irish banks that had also been hit by a real estate collapse.

Concerns Spain may need a bailout have eased, but some economists say the government would be wise to apply for 100 billion euros of aid purely for the savings banks, to clear up market concerns over their viability.

(Additional reporting by Sonya Dowsett)

(Reporting by Paul Day and Fiona Ortiz; Editing by Catherine Evans)