Markets are bracing for a string of failures in the Italian banking system and a possible EU bail-out, fearing defeat for Matteo Renzi’s reformist government in a crucial referendum this weekend.

Shares of Banca Monte dei Paschi di Siena (MPS) crashed 11pc on fears that a €5bn plan to recapitalise the broken lender could unravel if a ‘No’ vote leads to months of political turmoil, potentially bringing the anti-euro Five Star Movement closer to national office for the first time.

Italy’s biggest bank Unicredit fell 4.3pc and is approaching lows last seen in the financial panic in July. It has lost almost two-thirds of its value over the last year.

Sources in Rome say the Italian government may have to turn to the European Stability Mechanism (ESM) for a bank rescue, a humiliating and painful course that must be approved by the German Bundestag and other EMU parliaments. It would amount to a partial ‘Troika’ administration under terms dictated by the EU.

“We think the banks will have to raise €40bn in fresh capital. This is going to need an ESM bail-out,” said one senior Italian banker.

“The problems in the banks are becoming an excuse to put Italy under an EU programme. It won’t happen under Renzi because he won’t be there any longer after a ‘No’ vote. What we expect is a technocrat government that pushes this through,” he said.

Pier Carlo Padoan, the finance minister, has been widely touted as the next premier, though his appointment at this delicate juncture would invite a populist backlash.