UPDATE 1-Spain banks' bad loans highest since Oct '94
* Non-performing loans rise to 8.2 pct of portfolios
* House prices fall 7.2 pct in Q1
* Defaults to keep rising on back of budget cuts
MADRID, April 18 (Reuters) - Spanish banks' bad loans rose to their highest level since Oct. 1994 in February, to 8.2 percent of their credit portfolios, Bank of Spain data showed on Wednesday, as the sector continues to battle sliding house prices and a looming recession.
Banks are facing a new wave of loan defaults as an economic crisis deepens and analysts say some may not survive as the government implements sweeping budget cuts that will only add to Spanish households' problems with repaying debt.
Non-performing loans increased by 3.8 billion euros ($4.99 billion) to 143.8 billion euros in February from the previous month. They totalled 7.9 percent of total debt portfolios in January.
That picture - driven by the collapse of a housing boom in the global financial turmoil of 2008 - is at the heart of problems for Spanish banks that have seen other institutions refuse to lend to them and forced some to rely on the European Central Bank for funding.
Spain's unemployment rate is already the highest in the European Union and is expected to rise further - putting more pressure on consumers and households.
House prices also fell another 7.2 percent in the first quarter from a year earlier, according to the Spanish Public Works Ministry.
The Bank of Spain on Tuesday approved all 135 Spanish banks' plans to boost capital but said some may face difficulties meeting tough requirements set by the government.
The government set strict recapitalisation requirements in February to clean up the sector in an effort to reassure investors its ailing lenders won't need international help.
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