MADRID, Spain - June 1, 2010 - Spain's second-biggest savings bank, Caja Madrid, has asked for up to 3 billion euros ($3.7 billion) from a government rescue fund set up to promote mergers among the country's network of unlisted savings banks, a source close to the company said on Tuesday.

The government has set a June 30 deadline to tap money from the Fund for Orderly Bank Restructuring (FROB).

It wants the bigger savings banks to absorb the smaller, weaker ones after the sector's credit quality declined sharply due to heavy exposure to the country's property boom and bust.

Caja Madrid, in merger talks with regional savings banks Caja Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja, declined to comment.

Increased demand for support could result in needs for further funding by the FROB, leading to the fund seeking capital markets support in the short term, Barclays Capital said in a recent note.

Fitch Ratings on Tuesday downgraded FROB debt to AA+ from AAA following its similar downgrade of Spanish government debt on Friday.