Spain's government is finalizing plans to raise fresh funds for its troubled savings banks, officials said, as its efforts to force the country's regional administrations to cut spending began to bear fruit.

Madrid is hoping the regionally-based banks can raise the additional capital -- which the sources denied would reach the 30 billion euros ($40.47 billion) cited in a newspaper report -- from private investors as it battles to keep a tough austerity program on track.

But it has to date struggled to drum up interest in the lenders, five of which failed EU financial health checks last year, making them a focus of market concerns about the country's ability to manage its deficit, evoking parallels with the fiscal conditions that forced Ireland to seek a bailout last year.

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.

Spain is whittling down one of the euro zone's largest public deficit through wide-ranging 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 its 2011 spending by 10 percent after missing its deficits 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, falling 8 basis points to 219 bps -- its lowest level since early December -- though traders said activity was being driven by technical factors rather than news.

Ben May, an economist at Capital Economics, said Spain's regional administrations would have to sign up to the country'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 earlier on Thursday said 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.

An analyst said he believed the banks would need closer to 40-50 billion euros to plug their losses.

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 they 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 go to the markets to raise more money if the banks need more 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.

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

Spain's borrowing costs have soared over the past year and it has been under intense scrutiny by markets since Ireland was forced to take a 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 the country's banks after they were also caught cold 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.

(Reporting by Paul Day, Fiona Ortiz; Editing by John Stonestreet)