FRANKFURT (MarketWatch) — Investors dumped Italian government bonds on Wednesday, leaving the nation in danger of being shut out of credit markets and underlining fears that European authorities remain unprepared to take on the sovereign-debt crisis, threatening the survival of the euro currency.

The yield on benchmark 10-year Italian government bonds (10YR_ITA) was seen at 7.07% in recent trades, according to FactSet Research, up 67 basis points from Tuesday and above the 7% level viewed as a crucial threshold. The yield spiked to more than 7.4% in earlier activity.

The 7% level was seen as the point of no return earlier in the crisis for Greece, Ireland and Portugal, forcing those countries to seek aid from euro-zone partners and the International Monetary Fund.

“As the evidence of Greece, Ireland and Portugal has shown, once 7% is broken, the yield starts to rise exponentially. Every extra 1% on the yield structure for Italy’s debt profile costs an extra 3 billion euros ($4.1 billion) in service charges,” said Stephen Pope, managing director of Spotlight Ideas, a London consulting firm.

The yield premium demanded by investors to hold Italian debt over benchmark German bunds broke through 5 percentage points and remained at 5.35 percentage points.

The spike in yields came after clearing firm LCH.Clearnet raised the margin, or collateral, that traders must deposit to trade Italian bonds across all maturities. For bonds maturing in seven to 10 years, the margin was raised 5 percentage points to 11.65%, the firm said in a notice posted on its website. The hikes take effect at the end of the business day on Wednesday.

The euro EURUSD, +0.11% tumbled 1.6% versus the dollar to trade at $1.3599 in recent action. In Milan, the FTSE MIB stock index slumped 3.8% and U.S. stocks tumbled.

Italian President Giorgio Napolitano, alarmed by the sharp spike in yields, issued a statement saying there was no doubt Prime Minister Silvio Berlusconi would leave once new austerity measures are approved by parliament, Reuters reported.

The market moves highlight fears that European authorities still are not prepared to contain the crisis. Europe’s finance ministers said they expect to have measures designed to leverage the firepower of the region’s bailout fund to €1 trillion in place by next month.

“ ‘If you need to roll over any debt and nobody will lend to you and you cannot print your own money, then you are bust.’ ” — Gary Jenkins, Evolution Securities

But even then, doubts remain over the plan’s ability to convince investors it can provide an adequate firewall for Italy.

“The firepower of the EFSF [European Financial Stability Facility] is simply not sufficient to provide a backstop for Italy. Events have moved far faster than the labored political process the [European Union] can deal with,” said Simon Smith, chief economist at FxPro in London.

Based on the size of the bailouts for Greece, Ireland and Portugal, a similar bailout for Italy would total around €1.4 trillion, estimated Gary Jenkins, head of fixed income at Evolution Securities.

Meanwhile, with its total debt expected to hit €1.9 trillion by the end of this year, Italy’s total debt is 2.7 times larger than the combined debt of Greece, Ireland and Portugal, according to Jenkins. Italy needs to roll over more than €300 billion of debt next year.

Economists have noted that Italy’s fiscal position is much stronger than the bailout countries. Italy’s deficit has remained low relative to other euro-zone countries and it is running a primary budget surplus — that is, it’s not creating new debt.

But with a total debt load at around 120% of gross domestic product, Italy still faces a major challenge in rolling over its existing debt.

“You can have a minimal debt/GDP ratio, but if you need to roll over any debt and nobody will lend to you and you cannot print your own money, then you are bust,” Jenkins said. “Italy’s debt is far from minimal.”

The reaction to the news obliterated a market bounce that had followed Berlusconi’s announcement late Tuesday that he would leave office after parliament approves new austerity measures and structural reforms.

Berlusconi to quit after budget OK

The bond-market moves could put additional pressure on the European Central Bank to step up its purchases of Italian government bonds as Italy’s politicians struggle to implement budget measures and structural reforms aimed at reassuring financial markets.

Jane Foley, senior currency strategist at Rabobank, noted talk that the ECB, under the leadership of new President Mario Draghi, has bought only enough Italian debt to take the froth out of the market in an effort to put more pressure on the government to enact reforms.

“This morning’s news from LCH.Clearnet suggests that the ECB will have to step up its efforts to maintain an element of order in the Italian bond market,” she said.

Berlusconi formally announced Wednesday that he would step down after failing to secure the support of an absolute majority in the lower house of parliament in a routine budget vote. The tally showed Berlusconi would likely lose a vote of confidence.