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Saddled with billions of pounds worth of bad loans, the lender is now relying on a €5billion bailout to save it and stop a crisis that threatens to blow up Europe's financial system.

Italy's oldest bank Monte dei Paschi di Siena (MPS) came out as the weakest firm in the European stress tests, which are designed to show how banks would weather a severe economic crash.

The selling frenzy triggered a temporary trading freeze before leaving the firm's share price nursing losses of five per cent.

Investors rushed to dump UniCredit stock after stress tests issued Friday prompted worries over the firm's stability in a downturn.

The eurozone is already reeling from a weaker economic outlook after Britain's decision to leave the European Union (EU).

Now experts are downgrading Italy's long term outlook and say there is a growing risk the country's anti-establishment Five Star party could become a reality.

It comes ahead of a referendum in October or November that may end up with Prime Minister Matteo Renzi's resignation - plunging the country into chaos amid a change in government.

The Five Star party is calling for a referendum over the euro among over measures.

Mujtaba Rahman, practice head of Europe at Eurasia group, said: "Regardless of the referendum outcome and whether early elections are held, Italy’s medium-term political outlook is seriously deteriorating as the likelihood of a Five Star win in the next election is now significant.



"All the issues that have plagued Renzi’s government thus far – a stagnant economy, corruption scandals, banks – are likely to continue to do so.

"Stalling reforms would also expose Renzi to accusations of inaction; while progress on remaining items would alienate critical constituencies."