The cost of state borrowing in Italy has risen to a record level, prompting fears the country could be the next victim of the debt crisis.
The interest rate that Italy has to offer on its bonds has increased to more than 7%, reflecting investors' fears they may not get their money back.
The 7% level is widely viewed as unsustainable and was the point at which Portugal, Ireland and Greece were forced to seek a eurozone bailout.
Italy has now replaced Greece at the centre of the eurozone debt crisis.
German Chancellor Angela Merkel says Europe's plight is now so "unpleasant" that deep structural reforms are needed quickly.
She has warned that the rest of the world will not wait.
The increase in the cost of borrowing has come despite Prime Minister Silvio Berlusconi's pledge to resign after implementing economic reforms.
Financial markets have been clamouring for weeks for Mr Berlusconi to depart because of his failure to push through painful austerity measures.
However, his insistence on elections instead of an interim government opens the way for prolonged instability and delays to the reforms.
Mr Berlusconi opposes any form of transitional government and says polls are not likely until February, leaving a three-month policy vacuum in which the markets could create havoc.
President tries to calm markets
Italian President Giorgio Napolitano has tried to reassure the world's financial markets his country will be able to pay its massive debts.
He says parliament will adopt the package of economic reforms promised to the European Union "within days".
Mr Napolitano says once that has happened, he will immediately and quickly launch talks on forming a new government.
He says any fears that Italy could see a prolonged period of political and parliamentary inactivity are completely unfounded.
Mr Napolitano says it is possible at any moment to adopt emergency measures if needed.
