Markets nervous as Italian government nears collapse

"There's a sense things are now spinning out of control, with potentially dangerous consequences for both Italy and the eurozone," Nicholas Spiro, head of Spiro Sovereign Strategy, a London-based consultancy, told the news agency.

Other analysts were less alarmist.

Barclays bank said investors are likely to show "low activity" and "to remain on the sideline, waiting for more clarity on possible political developments."

But it also warned that if Italy holds emergency elections which lead to another hung parliament, it could prompt a "massive liquidation" of Italian bonds.

The jitters were prompted by the collapse of Italy's ruling coalition over the weekend.

Silvio Berlusconi, the leader of the centre-right PdL party, on Saturday pulled five of his ministers from centre-left Prime Minister Enrico Letta's cabinet, citing a dispute on VAT.

Letta himself called the VAT line a "huge lie."

He also called Berlusconi's move a "crazy gesture" designed to stop him being kicked out of the senate following a conviction for tax fraud.

Letta will hold a vote of confidence in parliament on Wednesday to see if he has enough support for minority rule.

But if MPs do not endorse him, he will be forced to hold snap elections, just seven months after the last vote and not long after Italy narrowly avoided an EU bailout.

Some ministers played down the potential fallout from the latest crisis.

Economy minister Fabrizio Saccomanni told Italian daily Il Sole 24 Ore on Sunday that markets have learned to live with Italy's political chaos.

"I think the uncertainty connected to the government's instability has been to a large extent already factored in during the last few weeks," he noted.

Labour minister Enrico Giovannini also said the Italian economy is strong enough to absorb the shock.

"Political instability could threaten not so much the economic recovery we expect before year-end, rather a pick-up in growth in 2014," he told Reuters.

He added, on a note of caution, however: "This crisis is the last thing we needed."

"If instability were to persist and affect the eurozone, then international authorities could put much stronger pressure on [Italian] national authorities," he said.