Spain"s government deficit was 10.2% of the country"s economic output in 2012, well above the agreed 6.3% target, and will stay far above target into 2014.
Meanwhile, the Commission joined other major international organisations in admitting that the eurozone economy would contract in 2013.
It is forecast to shrink 0.3%, making the governments" task even harder.
Previously, the Commission had expected the 17 economies in the eurozone would collectively enjoy 0.1% positive growth this year. In 2012 the economy is estimated to have shrunk 0.6%.
Delivering its winter forecast, Commission Vice-President Olli Rehn said that unemployment across the single currency area expected to continue rising to 12.2% this year as the recession lingers. Last year"s jobless rate was 11.4%.
However, he said the eurozone was expected to rebound in the last three months of this year, registering 0.7% growth in the fourth quarter.
The forecast appears somewhat more pessimistic than the European Central Bank President Mario Draghi, who last month said he believed the eurozone would begin recovering in the second half of this year.
The Commission"s acknowledgement that the eurozone is in worse economic shape than previously hoped comes after the International Monetary Fund said in January that it expected the eurozone to experience a "mild recession" in 2013, having previously predicted growth.
The World Bank also revised down its global growth forecasts earlier in January, as the world economy appeared to falter in the last three months of 2012.
Additional measures needed
The austerity measures being implemented by eurozone governments are widely blamed by economists as a major contributor towards the Continent"s economic woes, although there is disagreement among economists as to whether governments should therefore go easy on the spending cuts.
Spain, which has one of the biggest budget deficits, made the least headway in bringing its finances back under control, and faces one of the nastiest recessions.
Of its 10.2% deficit in 2012, 3.2 percentage points was due to the cost of cleaning up its banking system, which has been decimated by loans made to property developers and speculators during the last decade"s housing bubble that have since proved unrepayable.
More worryingly, the Commission does not expect Spain to improve greatly over the next two years. Its deficit is forecast to be 6.7% this year, compared with a 4.5% target, and 7.2% in 2014, compared with a 2.8% target.
Spain cannot simply blame its weak economy for this outcome, the Commission implied. Madrid"s structural deficit - which strips out the effect of the recession - fell only by 1.4% of GDP last year, barely half the 2.7% target set by the Commission.
However, overspending by governments across the eurozone as a whole is still expected to fall on average this year. That is despite the persistent economic downturn, which typically reduces governments" tax revenues and increases their benefit bills.
The Commission said that the aggregate deficits of the 17 eurozone governments would fall from 3.5% of economic output or GDP last year, to 2.8% this year.
Meanwhile, the Commission was concerned about a "surprise" fall in Portugal"s economy, which shrank 3.2% in 2012 and is forecast to contract by another 1.9% in 2013.
It also predicted that the UK would grow 1% in 2013, compared with the 1.1% previously forecast.
The British government was told that it was also not on target with its deficit reduction - with government overspending expecting to increase to 7.4% of GDP this year, the worst in the European Union, from 6.3% in 2012 - and would need to take additional austerity measures.