Italy's borrowing costs have hit a record high bringing the eurozone's third largest economy dangerously close to the point where it would need a bailout.
The yield on Italian ten year bonds rose to 6.64% on Monday but has since dropped back slightly.
The value of global stocks and euro dropped on Monday amid fears of mounting political instability.
The Italian stock market rose briefly on hopes that Prime Minister Silvio Berlusconi was about to resign but the recovery was reversed when Mr Berlusconi denied the rumours.
Many close to him still believe his days are numbered.
Mr Berlusconi's centre-right government is struggling to maintain its parliamentary majority and faces a crucial vote in the next day or so.
The situation in Italy is overshadowing developments in Greece to form a new coalition government in order to secure continued eurozone bailout payments.
The BBC reports that markets are viewing Italy's ability to repay its debt as increasingly doubtful.
France cuts more spending
The French government has announced further austerity measures designed to cut its deficit and restore market confidence.
Sales tax and corporation tax are being raised and an increase in the retirement age is being brought forward.
The changes come on top of a previous austerity programme announced only three months ago and less than six months before French President Nicolas Sarkozy faces an election.
