Italy was thrown into political and economic turmoil Wednesday, with borrowing rates hitting "dangerous" levels after Prime Minister Silvio Berlusconi said he would resign and not run for office again.
Ten-year bond yields broke through the 7% threshold seen as unsustainable for refinancing of Italy’s massive debt of 1.9 trillion euros.
"I won't run for office," Berlusconi said a day after announcing he would step down once a key economic reform law was adopted in parliament.
The euro dived below $1.36, nearing a one-month low, amid fears that Italy would need a bailout just like Greece. German Chancellor Angela Merkel said Europe's plight was now so "unpleasant"that deep structural reforms were needed quickly, warning that the rest of the world would not wait.
US stocks dropped more than 2% in early trade. "Europe stocks are lower because of Italy," said Jon Ogg of 24/7 Wall Street.
Italian President Giorgio Napolitano sought to reassure markets, saying Berlusconi would resign and the country would either have a new government or early elections soon.