Italian Prime Minister Mario Monti yesterday played down market fears over his decision to resign, saying there was no danger of a vacuum ahead of an election in the spring.
"Markets should not fear a vacuum of decision making in Italy," he told a press conference in Oslo where he attended the Nobel peace prize ceremony.
But Italy's stock market fell sharply and its borrowing costs jumped yesterday as investors and European leaders worried over the country's political and financial future.
Italy's main stock index, the FTSE MIB, fell 2.3 per cent to 15,340. The interest rate on the Italian government's 10-year bond - an indicator of how risky investors consider a country's ability to pay down its debt - rose 0.30 precentage points to 4.52 per cent.
Other European stocks also fell in early trading but regained ground after the stocks inched higher on Wall Street.
Monti said on Saturday he would resign earlier than expected after Parliament passes the state 2013 budget, saying it was impossible to continue after the political party of former Premier Silvio Berlusconi withdrew its support in two crucial votes last week.
Monti said yesterday he is not currently considering whether to stand in elections early next year.
"I'm not considering this particular issue at this stage. All my efforts are being devoted to the completion of the remaining time of the current government," he said in Oslo.
"I understand market reactions, they need not be dramatised. I am very confident that the Italian elections, when they come, will give room to whatever coalition ... the government will be, in my view, a highly responsible one," he said.
Spain's government said the nation was being hit by contagion. "The help that Spain needs [is] that the uncertainties over the future of the euro be eliminated," Spanish Economy Minister Luis de Guindos told public radio RNE.
"Every time there are doubts, today we are seeing it, we are seeing it in the case of Italy, when doubts surface over the political stability of a nearby country such as Italy, it infects us immediately," he said.
Monti's departure, expected later this month, means Italy is on course to hold its general elections in February, as much as two months early. Berlusconi announced over the weekend that he would run for a fourth term, although his Freedom People party is lagging in the polls.
Meanwhile the case involving Berlusconi and a young Moroccan call-girl took a dramatic turn as she failed to turn up at a court hearing and told her lawyer she had left the country.
The court ordered police to track down Karima El Maghroug, known as "Ruby the Heart Stealer", and interrogate her partner and friends as part of their search.
Agence France-Presse, Reuters, Bloomberg