Yields on Italy's 10-year state bonds surged to a new high on Tuesday of 6.73 percent, the highest since the introduction of the single European currency, ahead of a crucial vote of confidence in the Italian government.
The surging bond yields will push up the Italian government's borrowing costs and could put Italy, the eurozone's third largest economy, on the brink of seeking bailout funds.
Investors see seven percent as the benchmark level beyond which the cost of borrowing would be unaffordable for the Italian government and hamper its ability to refinance previous debts.
The Italian parliament will hold a vote on the government's 2010 budget on Tuesday. The sitting may also result in a vote of no-confidence in the centre-right government headed by Silvio Berlusconi, who is under massive pressure to resign.
The Italian authorities have been criticized for their inability to implement vital economic reforms amid worsening economic problems in the eurozone.
European Central Bank Governing Council member Yves Mersch told the Italian newspaper La Stampa on Monday that the bank would not buy Italy's bonds, if the Italian government failed to assure the bank of its intention to cut spending and carry out structural reforms.
