Katona was dropped from CAN Associates last week after allegedly missing a regular doping test requested by her agent Claire Powell.
A friend of the reality TV star said: "It's as if there's a monster inside her which leads her towards self-destruction. And that monster seems to be back."
The newspaper has printed photos of Katona dancing on tables with Mel B's sister Danielle Brown in Marbella earlier this month.
The management split may lose Katona her OK! magazine column and £1 million in other deals. Since Katona breached her contract, CAN are also reportedly demanding that the reality TV star gives back the rent payments and school fees they paid on her behalf.
The friend added: "It is so tragic. She'd just turned her life around. She got off drugs and she was getting closer to clearing her bankruptcy. She now owes Claire thousands and thousands of pounds but has nobody lining up any work.
"And all she wants to do is go out and get trashed."
Speaking about the nights out in Spain, an insider revealed: "She was clearly out of control. She was trying to grope everyone and even went to the toilet with the door wide open."
"It wasn't comfortable to watch her in that sort of state. At one point Kerry ended up vomiting. She did the same thing on a night out back in London this week.
"For a long time Claire had been drug testing Kerry on a fortnightly basis to ensure she was off drugs. But they both gave up because all Kerry wanted to do was go out and party."
Katona denied rumours that she had been dropped because she had returned to using drugs, adding that she left on her own accord.