This whole story seems like an over-reaction. I've listened to the interview (the bit about Spain is ~2:58 in), and I don't blame McCain for getting confused. I'd read the transcript beforehand, and even then some of the presenter's pronunciation, especially across a phone line that fuzzy, could have been indistinct. If it had been a face-to-face interview in the studio, I seriously doubt there would have been a problem.
I can't believe how aggressively some bloggers are attacking McCain over this; rather than giving him the benefit of the doubt until an annoucement comes from his campaign, they're dogpiling him.
It's not a simple case of "he doesn't know where Spain is" versus "he thinks Spain are terrorists" - there's also the possibility that he simply misheard her and wasn't familiar with the Spanish PM's name - he's hardly the only American guilty of that.
Hell, I'm in Europe and I couldn't tell you the names of half the leaders in the continent. I didn't even know who the Northern Irish First Minister is right now before checking Wikipedia.