By Julien Toyer and Luke Baker

MADRID/BRUSSELS (Reuters) - Spain formally requested euro zone rescue loans on Monday to recapitalize banks that are laden with bad debts as the euro and shares fell due to investors' skepticism that a European Union summit this week will act decisively on the bloc's debt crisis.

Spanish Economy Minister Luis de Guindos asked for up to 100 billion euros ($125 billion) in a letter to Euro group chairman Jean-Claude Juncker, saying the final amount of assistance would be set at a later stage.

He confirmed his intention to sign a Memorandum of Understanding for the package by July 9 and said the amount should be enough to cover all banks' needs, plus an additional security buffer.

The EU's top economic official, Olli Rehn, said a deal on terms for the loan from Europe's bailout funds could be concluded in a matter of weeks.

"The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state aid rules," he said.

The rescue, agreed on June 9, is intended to help Spanish lenders recover from the effects of a burst real estate bubble and a recession, which have piled up bad loans and sinking property portfolios. Prime Minister Mariano Rajoy told business leaders 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.

Two independent audits last week put the Spanish banks' capital needs in a severe economic downturn at up to 62 billion euros, and a fuller audit will be delivered in September.

Some market economists believe the rescue is merely a prelude to a full bailout for the Spanish state, which saw its borrowing costs soar to euro era record levels above 7 percent early last week, although they have eased to below 6.50 percent.

Spanish and Italian bond yields began to rise again on Monday as markets digested the outcome of a meeting of leaders from the euro zone's four biggest economies in Rome last Friday at which German Chancellor Angela Merkel rejected any new financial commitments to underpin the single currency.

A German government spokesman said on Monday that Merkel was worried that just before the full EU summit on Thursday and Friday, people were expressing a wish for "supposedly easy solutions" such as shared liability.

A working document prepared by top European Union officials calls for the gradual introduction of a banking union, starting with supervisory power for the European Central Bank and developing a deposit guarantee scheme based on pooling national systems, with a levy-funded bank resolution fund.

BERLIN REJECTION

Berlin has so far rejected any joint deposit guarantee or resolution fund, as well as proposals that euro zone governments should assume joint responsibility for each other's debts.

Finance Minister Wolfgang Schaeuble hammered home this message in weekend interviews, saying that throwing more money at the crisis would not solve the problems, and telling Greece it must try harder rather than seeking to soften bailout terms.

"We have to fight the causes," Schaeuble told German TV network ZDF. "Anyone who believes that money alone or bailouts or any other solutions, or monetary policy at the ECB - that will never resolve the problem. The causes have to be resolved."

He cited Ireland and Portugal as countries that were succeeding in their EU/IMF adjustment programs and said Greece had not made a sufficient effort.

Merkel and French President Francois Hollande, whose position is close to that of the top four EU officials, will have one more try at narrowing their differences before the summit on Thursday and Friday. Continued...