The Italian government's borrowing cost has risen as fears grow over political uncertainty in Rome.

The yield on Italian 10-year bonds rose from 6.37% to a euro-era high of 6.67%.

It is feared that Italy, the eurozone's third biggest economy, could become the next victim of the debt crisis. PM Silvio Berlusconi faces a crunch vote on public finance on Tuesday.

Mr Berlusconi denied on Facebook reports that he was about to resign.

Stock markets across Europe bounced up on the chance of the Italian premier's departure but returned to negative territory at Monday's close.

In London, the FTSE 100 ended down 0.3%, France's Cac 40 fell 0.6%, and in Frankfurt the Dax index closed down 0.6%.

But on Wall Street, the Dow Jones bucked the trend, closing up 0.71% at 12,068.4.

Concerns over Italy are overshadowing developments in Greece, where Prime Minister George Papandreou has agreed to stand down.

Mr Papandreou sealed a deal with the opposition to form a new coalition government to approve an EU-IMF bailout package.

Once the vote has been passed, it will open the way for Greece to receive the next 8bn euro tranche of bailout loans.

The deal was welcomed by investors, with the main Athens bourse up 1.4%, lifted by the banking sector. Shares in Alpha Bank were up 6.8% while Hellenic Postbank rose 8.9%.

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The markets are viewing Italy's ability to repay its debt as increasingly doubtful.

The spread between Italian and German 10-year government bond yields widened to 488 basis points in early trading, its widest level since 1995.

The yield on Italian one-year bonds also jumped to 6.3% from 5.5% on Friday, though it later fell back to 6.1%.

By comparison, the yield on German one-year bonds is 0.26%.

It comes as data on Monday showed the European Central Bank (ECB) more than doubled its purchases of government bonds in the first week of Mario Draghi's presidency.

Purchases totalled 9.52bn euros, compared with the previous week's 4bn euros and was the most the bank has spent since mid-September.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers in London, said the worries over Italy were not so much about the economy but about the state of the political situation.

"This may be the beginning of the end for Berlusconi," he told the BBC.

"We're talking about a completely different animal when it comes to Italy [compared with Greece].

Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

"Greece is responsible for 2% of [the eurozone's] GDP whereas Italy is the third biggest economy behind Germany and France."

Pressure is growing on Mr Berlusconi ahead of Tuesday's vote on the budget.

Euro discussions

Eurozone finance ministers met in Brussels on Monday.

After their meeting they called on the new government of Greece to approve in writing the terms of the international bailout in exchange for the release of the next tranche of funds.

On Tuesday, finance ministers from the full EU will meet.

However, the BBC's Europe correspondent, Chris Morris, understands there will be no agreement on details of the expanded European Financial Stability Facility (EFSF) bailout fund.

Leaders have agreed in principle to boost the EFSF from its current 440bn euros (£375bn) to 1 trillion euros, in order to tackle debt problems in Italy and Spain.

Last week, world leaders from the G20 countries agreed to boost the resources available to the IMF, but gave no detail on plans for the eurozone.

Meanwhile, representatives from the European Commission, the European Central Bank and the International Monetary Fund (IMF) - the so-called troika - were in Lisbon on Monday for their latest evaluation of how Portugal is implementing its bailout package.