The treasury sold 1.005 billion euros ($1.437 billion) of six- and 12-month bonds at auction, slightly above the top end of its targeted range, the government debt agency IGCP said.

But the average yield, or rate of return earned by investors, leapt to 5.902 percent for the 12-month bills from 4.331 percent at the last such auction on March 16.

For the six-month bonds, the rate soared to 5.11 percent from 2.984 percent on March 2.

Demand was strong for both bills.

“Today’s (auction) is clearly a test as Portuguese banks are more and more worried by their current overall exposure to Portuguese debt, which keeps deteriorating,” said Jean Francois Robin, a strategist at Natixis in Paris.

Portugal must repay some 4.2 billion of bonds euros by April 15 and another 4.9 billion euros in mid-June.

“While we believe that the country has sufficient funds available for next Friday’s redemption, we doubt that it is capable — at the moment — of meeting the June obligation,” analysts at Lloyds Bank Corporate Markets told Dow Jones Newswires.

The markets increasingly believe that Lisbon will be forced to seek an international bailout, such as those granted to fellow eurozone strugglers Greece and Ireland last year.

They are demanding ever higher rates of return to provide fresh funds to cover its debt.

Moody’s Investors Service on Tuesday downgraded Portugal’s ratings by a notch from A3 to Baa1 and warned that it expected the country to have to seek outside help to resolve its debt problems.

Moody’s said its decision was “driven primarily by increased political, budgetary and economic uncertainty, which increase the risk that the government will be unable to achieve (its) ambitious deficit reduction targets” in the period 2011-2014.

The downgrade follows others by Moody’s itself and the other top ratings agencies after parliament rejected the government’s latest austerity package last month, forcing its resignation.

The government Wednesday denied that it had launched negotiations with its European partners to obtain emergency funding.

“The information is false. These are only rumours without foundation. We deny them, there no type of contact at all,” a official in the office of Socialist Prime Minister Jose Socrates told AFP.

Several officials, including those in the banking sector, have called on the outgoing government to seek emergency funds from the European Commission to cover immediate requirements ahead of general elections scheduled for June 5.

The European Commission said Tuesday Portugal would not be able to secure a bridging loan from its European partners without agreeing first to an international debt bailout under strict conditions.

But some Portuguese media said Wednesday Lisbon and the EU were holding talks.

The head of the International Monetary Fund Dominique Strauss-Kahn urged the government to take neceseary tough measures to tackle the crisis.

“The situation is in the hands of the Portuguese government,” he told Spain’s leading daily El Pais.

“They must show lenders that they are taking adequate measures,” he said in an interview, published in Spanish, which he also gave to the Washington Post and Italy’s La Repubblica.

President Anibal Cavaco Silva on Thursday called early general elections, a week after Socrates resigned when parliament rejected the new austerity programme put forward by his minority government.

— with Dow Jones Newswires —