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Italian financial markets plunged on Monday after Prime Minister Mario Monti announced he will step down ahead of a general election, as European leaders urged Italy to stay the course on reforms.
Stocks were down 3.2 percent in afternoon trading and the spread between the yields on Italian and German bonds widened to more than 360 basis points -- a key measure of investor skittishness.
"Italy is paying dearly for its goodbye to Monti," Italian financial news website firstonline.info said.
Monti's imminent departure and Silvio Berlusconi's comeback bid "have created havoc," it said.
Silvio Berlusconi's announcement helped fuel concerns, even though polls indicate the three-time prime minister will lose the upcoming general election to centre-left leader Pier Luigi Bersani.
The slump had a knock-on effect for other vulnerable eurozone economies, with Spanish Economy Minister Luis de Guindos warning that the "doubts" in Italy were hitting Spain's financial markets.
"When doubts surface over the political stability of a nearby country such as Italy, it infects us immediately," he told public radio RNE.
European Commission President Jose Manuel Barroso warned that the upcoming elections should not be an excuse to postpone important reforms for Italy.
"There are no quick fixes, there are no magic solutions," he told Italian news channel SkyTG24.
Analysts played down fears of a prolonged financial storm for Italy, however, pointing out that Bersani has promised to stick to Monti's reforms if elected.
Italian bank giant UniCredit said there would be "weakness" on the markets in the short term but it was unperturbed about the longer-term outlook.
The bank said the two most likely election outcomes were either a coalition led by the centre-left Democratic Party or a new Monti government.
"Both scenarios seem consistent with a continuation of the reform process," analyst Luca Cazzulani said.
Berlusconi's People of Freedom party kicked off the political firestorm by withdrawing its support in parliament for Monti's government on Thursday.
Berlusconi then launched his campaign on Saturday, indicating that he will run against Monti's austerity measures and "diktats" from Europe.
Monti on the same day said he will resign as soon as parliament approves next year's budget, bringing forward the likely date for elections to February.
Key reforms still pending in parliament, including an overhaul of local government, are now in doubt.
"Italy must not stand still after two-thirds of its reform process," German Foreign Minister Guido Westerwelle told newsweekly Spiegel.
The minister added: "That would bring new turmoil not only to Italy, but also to Europe."
After months on the financial high-wire for Italy in 2011, Monti's arrival in November last year calmed the markets as he embarked on an ambitious agenda of austerity and reforms to boost growth.
"Everyone's fears are concentrated on the performance of a country which, just a year ago when Berlusconi was at the helm, risked bringing down the euro and the global economy with it," the leftist La Repubblica daily said in an editorial.
-- 'The house is still on fire' --
A three-time prime minister, the 76-year-old Berlusconi is running for office for the sixth time in a stormy political career spanning two decades.
He was convicted of tax fraud in October but his one-year prison sentence and five-year ban from public office have been suspended pending an appeal.
Berlusconi is also a defendant in a trial for having sex with an underage 17-year-old prostitute.
Karima El-Mahroug, better known as "Ruby the Heart-stealer" was due in court on Monday as a witness for the defence but failed to show.
Prosecutor Ilda Boccassini accused Berlusconi's defence of creating "a strategy to delay the trial so as to make it through the election campaign" before a verdict, which is expected next year.
The Catholic Church, which turned firmly against Berlusconi as the accusations of his "bunga-bunga" sex parties emerged, slammed those who would seek to undo Monti's work over the past year.
"We can't let the sacrifices of a year go to pot. The most astonishing thing is the irresponsibility of those who think of arranging things for themselves while the house is still on fire," Cardinal Angelo Bagnasco, head of the Italian Bishops' Conference, told Corriere.
Avvenire, the influential newspaper of the bishops' conference, said Monti had provided a "serious and disinterested" service for Italians and said it hoped it would "not be his last" -- a hint about a possible political future for the economist.
The former high-flying European commissioner was voted in by parliament after Berlusconi was forced out by a rebellion in his ranks, a wave of panic on the financial markets and a series of sex scandals.
Supporters say Monti has managed to pull Italy back from the brink of bankruptcy but some of Monti's measures like a new property tax, budget cuts and a reform of pensions have proved deeply unpopular.
The economy has also remained stuck in recession.
Official data on Monday showed gross domestic product (GDP) shrank by 0.2 percent in the third quarter and by 2.4 percent on a year-on-year basis.
The government says recovery will start next year.
But top European Central Bank member Joerg Asmussen told Germany's Bild daily that Monti's government had "achieved a great deal in a short time."
"Whoever governs Italy, a founding country of the EU, after the election must continue this course."
© 2012 AFP
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