Italy is preparing a €40bn rescue of its financial system as bank shares collapse on the Milan bourse and the powerful after-shocks of Brexit shake European markets.

An Italian government task force is watching events hour by hour, pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people,” said premier Matteo Renzi.

“This is the moment of truth we have all been waiting for a long time. We just didn’t know it would be Brexit that set the elephant loose,” said a top Italian banker.

The share price of banks crashed for a second trading day, with Intesa Sanpaolo off 12.5pc, and falls of 12pc for Banka MPS, 10.4pc for Mediobana, and 8pc for Unicredit. These lenders have lost a third of their value since Britain’s referendum.

“When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors.

The country is the first serious casualty of Brexit contagion and a reminder that the economic destinies of Britain and the rest of Europe are intimately entwined. Morgan Stanley warned in a new report that eurozone GDP would contract by almost as much as British GDP in a "high stress scenario".