European stocks fell sharply Tuesday amid larger worries about European resolve on a Greek bailout and speculation that Italy is edging toward default.

Italy's cost of borrowing has soared this week and yields on the government's benchmark 10-year bonds rose to a euro-era record earlier today. Markets in London, Paris, Madrid, and Milan fell sharply in morning trading.

Italian Finance Minister Giulio Tremonti today chairs an emergency session to cut $56 billion from the budget, an austerity measure designed to reassure markets.

The session follows separate meetings on Italy and Greece in Brussels yesterday by the highest-ranking EU officials responsible for government and banking.

Analysts say it is not the Greek crisis per se, but the lack of an agreed EU rescue and concomitant political resolve, that troubles markets and is focusing attention on Italy’s position.

Jacques Cailloux, chief European economist for the Royal Bank of Scotland, said Monday that the Italian crisis represents “a new phase” in the financial crisis of Europe, and warned against a “domino effect.”

Yields on Italian bonds leaped from 5.2 percent yesterday morning to near 6 percent today -- drawing comparison to a similar spike last November in Ireland, a substantially smaller market. Safer German 10-year bonds -- the eurozone benchmark -- are yielding under 3 percent. The 300 basis-point difference, or spread, between the two reflects investor fears over the greater likelihood of an Italian default.

Germany's Chancellor Angela Merkel phoned Italy's Prime Minister Silvio Berlusconi on Sunday to urge passage of the austerity plan, something he's resisted until now.

The EU meeting on Italy yesterday took place with little advance warning. European officials declined to call it a “crisis” meeting, though it was set in the wake of sharp stock falls in Italy Friday. The EU officials had gathered to discuss a second Greek bailout following a $150 billion package promised last year.

The terms of a second bailout are contested. If the money doesn't come and Greece defaults, investors worry that an ugly cycle will start that could hit struggling states like Italy, Ireland, Portugal, and Spain. Greek debt is owned by banks throughout Europe, including in Italy, and cross-defaults far beyond Athens could be triggered if Greece isn't bailed out. In the wake of a default anywhere in Europe, investors are sure to demand an even higher premium over the German 10-year bond to lend to financially weaker states like Italy. Those higher interest rates, in turn, make it harder to pay back mounting debt, and increase the likelihood of eventual default.

July 8 is being described as “black Friday” in Rome, when markets plummeted after the German newspaper Die Welt quoted unnamed officials close to the European Central Bank saying that the current EU bailout fund was not adequate to handle an Italian collapse and would have to be doubled.

Yesterday’s meeting was called by EU chief Herman Van Rompuy and reportedly included Jean-Claude Trichet, head of the European Central Bank, Jose Manuel Barroso, European Commission chair, Jean-Claude Juncker, head of the Eurozone finance ministers, and Olli Rehn, who leads the EU economic and monetary section.

Mr. Trichet Sunday told an economic gathering in France that Europe was the “epicenter” of a debt crisis that concerned the markets of all the world's advanced economies.

“For Italy it is new data, internal political tensions, and uncertainty,” says Luigi Speranza, a London based economist with the French bank BNP Paribas. “For Spain, it is Italy and concern over the banking sector, and uncertainty. But it’s not really about Spain or Italy anymore. It’s about the entire eurozone. It’s quite hard to disentangle it anymore.”

Italy’s $2.5 trillion debt is twice that of Greece, Portugal, and Ireland combined. Italy has the third-largest bond market in the world after the US and Japan. Its sovereign debt is 25 percent of Eurozone debt, and its debt-to-GDP ratio is second only to Greece. Italian banks reportedly hold as much as 32 percent of its debt.

Some Italian banking officials have said the focus on Italy will diminish once a deal on Greece is secured.

"There has been a speculative attack on Italy in the past few days which is not justified by the fundamentals of either the country or the banks," Antonio Vigni, managing director of Banca Monte Paschi told Reuters news agency.