Cyprus on Monday became the fifth eurozone country to seek a formal bailout amid mounting economic problems and fresh challenges for its banks after a downgrade by credit rating agency Fitch Ratings.

Cyprus announced that it was seeking a lifeline for its banks and its budget, joining the likes of Greece, Ireland, Portugal and Spain in seeking EU rescue funds.

More than 25% of the 17 eurozone members have now sought some sort of emergency financial rescue. Italy could well turn out to be the next candidate for a bailout as it's funding costs too have soared recently.

An island with just one million residents, Cyprus has a disproportionately large financial sector that is heavily exposed to Greece.

Cyprus has just four days to raise at least €1.8bn - equivalent to about 10% of its GDP - to meet a deadline set by European regulators to recapitalise Cyprus Popular Bank, its second largest lender which saw its balance sheet hurt by bad Greek debt.

Cyprus' Finance Minister Vassos Shiarly said the country would also seek enough money to help with its budget deficit. The full amount would be decided over the course of weeks. "The amount will be as much as it may be needed to cover the recapitalisation and fiscal requirements," he was quoted as saying.

Cyprus suffered a further sovereign credit rating cut on Monday by Fitch, to the junk BB+ grade. It is finding it tough to raise new funds from the markets, with yields on existing bonds well into double digits.

Jean-Claude Juncker, head of the Eurogroup of eurozone leaders, said that Cyprus would have to negotiate aid conditions with the EU and the European Central Bank.

"This will include measures that will address the main challenges of the Cyprus economy, primarily those of the financial sector, and I expect that Cyprus will engage with strong determination in the required policy actions," Juncker said.

Spanish and Italian bond yields rose on Monday as doubts increased about the ability of the EU leaders to come up with decisive action at a summit in Brussels. Spain saw its borrowing costs soar to euro era record levels above 7% early last week.

Spain formally submitted its request for funds to bail out its ailing banks, agreed on June 9. Spanish Economy Minister Luis de Guindos asked for up to €100bn in a letter to Juncker, saying that the final amount of assistance would be set at a later stage. He said the amount should cover all banks' needs, plus a buffer.

Two independent audits last week put the Spanish banks' capital needs at up to €62bn.

Spanish Prime Minister Mariano Rajoy told business leaders that he would soon take new measures to revive economic growth and create jobs. He gave no details but said the government remained committed to cutting the public deficit.