Italy's political drama rattles markets

Italian Prime Minister Mario Monti announced he will resign once next year's budget is approved. Source: AAP

ITALIAN stocks have plunged over three per cent and debt markets are rattled after a weekend of political drama which kicked off a two-month election campaign in this key eurozone member state.

Investors reacted skittishly on Monday to Prime Minister Mario Monti's decision to resign in the coming days and the improbable comeback bid by Silvio Berlusconi on an anti-austerity platform.

After months on the financial high-wire for Italy in 2011, Monti's arrival late last year and the austerity measures and economic reforms he has implemented calmed the markets.

But investors are now anxious that his impending departure could fling the country back into the eurozone debt crisis mire once more.

"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 Repubblica newspaper said in an editorial.

Developments have put the Monti government's reform agenda on hold and brought forward the election, with a vote now expected in February - well before the government's mandate runs out in late April.

The Italian stock market opened down and plunged to minus 3.34 per cent in early trading, with the country's biggest banks leading the drop.

Italian banking giant UniCredit said there would be "weakness" on the bond markets in the short term but its analysts were unperturbed about the 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 in a note.

Giovanni Zanni, head of European economics at Credit Swisse, also played down concern in some quarters that Italy could be forced to make an immediate request for bailout funds, judging it to be "extremely unlikely."

Centre-left leader Pier Luigi Bersani has promised to keep the course set by Monti if elected, although he says he will moderate the most controversial austerity measures of recent months and put more emphasis on growth and jobs.

Greater unease could come from Berlusconi's return to the fray and his announcement that he will wage a campaign against key aspects of Monti's agenda.

"There is not one single economic indicator which is positive. The experiment with a technocrat government is over - with, alas, totally negative results," Berlusconi said late on Sunday.

A three-time prime minister, the 76-year-old Berlusconi is running for office for the sixth time in two decades in politics.

In the latest in a series of trials, he was convicted of tax fraud in October but his sentence to a year in prison and a 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.

"Ruby the Heart-stealer" was due in court on Monday as a witness for the defence but failed to show, prompting prosecutor Ilda Boccassini to accuse Berlusconi of creating "a strategy to delay the trial so as to make it through the election campaign" before a verdict.

The Catholic Church, which withdrew support from Berlusconi as the accusations of his "bunga-bunga" sex parties emerged last year, 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.

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