The city government, led by an alliance of leftist groups, including members of anti-austerity Podemos party which is close to Greece's ruling Syriza, said in a statement on Monday it would closely review all of its swap agreements with banks with a view to possible legal action.
Under these contracts city hall must pay a fixed interest rate on its debt which is much higher the existing market rate, the statement said.
"This is how enormous amounts of money have been lost," city hall said,
It estimated that the difference in the interest rate that it pays and the market rate has cost it €247 million ($280 million) in extra interest payments as of August.
Madrid's city government has €1.99 billion of debt in variable interest rates, of which 90 percent is linked to "risky" financial products, the statement said.
The possibility of a legal challenge of the terms of the swap deals in court is likely to heighten businesses' concerns about the administration of Manuela Carmena, the leftist new mayor of the Spanish capital.
Carmena, a former judge, came to power earlier this year as part of a broader swing to the left in May local and regional elections, putting an end to 24 years of rule in the Spanish capital by the market-friendly conservative Popular Party which governs at the national level.
She has ordered an sweeping audit of the public finances of the city of some 3.5 million residents, which has a total debt of six billion euros.
At the beginning of the month Madrid's city government announced it was considering not renewing its contracts with credit rating agencies Standard & Poor's and Fitch.