Stocks fell, the euro weakened and Italy's borrowing costs climbed to a record yesterday as global investors shifted their worries to Rome from Athens, fretting that the Italian prime minister Silvio Berlusconi cannot secure a majority in an important parliamentary vote.
Italy's parliament will decide today on the 2010 budget report, a test of Mr Berlusconi's uncertain political strength as his majority unravels.
Stocks had trimmed losses around midday yesterday on talk that Mr Berlusconi was about to resign. But he dismissed the talk as baseless, according to the Italian news agency Ansa.
Italy's uncertainty fuelled concern the debt crisis could engulf the bloc's third biggest economy, and prompted investors to cut exposure to riskier assets.
The yield on Italy's 10-year bonds - a measure of the risk associated with them - jumped a third of a percentage point yesterday to 6.58 per cent, its highest since the euro was established in 1999 and near the 7 per cent threshold that forced Ireland and Portugal to accept bailouts.
All the attention on Italy overshadowed a government coalition deal in Greece, which appears to have stepped back from the brink. Greece's prime minister George Papandreou has agreed to step down, opening the way for a new government to pursue international financing.
"The focus is Italy; Italy's clearly the big one. Everyone expected what has come out of Greece," Christopher Potts, strategist at Cheuvreux, said. "The whole problem is the [Italian] opposition and its disarray. Who takes over and how will it be organised? No one has the answer but it's of huge importance."
The ultimate fear is that Italy might need to ask for an international bailout to handle its enormous €1.9 trillion (Dh9.6 trillion) debt. That is too expensive for the euro zone's 17 countries to do, and could trigger a default that would break up the bloc and drag down the global economy.
During a G20 summit in France last week, Mr Berlusconi asked the International Monetary Fund to monitor the country's reform efforts, a humiliating step for such a large economy.
There is growing concern that Mr Berlusconi is the problem because he no longer commands enough loyalty among legislators to ensure the quick reforms that international financial officials say Rome must achieve to avoid a debt crisis. His coalition government has suffered defections and the possibility of early elections is growing.
The cabinet minister Renato Brunetta, a Berlusconi loyalist, said the government has a "numbers problem" in parliament and if a majority is lacking then "everybody goes home."