Stocks recovered from early big losses Monday as Italy's borrowing costs eased on mounting speculation that the Italian Premier Silvio Berlusconi would soon resign.
Following last week's turmoil centered on worries that Greece was heading for an imminent bankruptcy, investor fears are now focused on Italy, the eurozone's third largest economy. Italy is also the third-biggest debt market in the world.
If its cost of borrowing rises too much, then Italy wouldn't be able to raise the money it needs to roll over its debts, potentially raising fears over the European banking system and the global economy.
The growing worry is that, at some point, it will cost too much for Rome to borrow money from markets — as it did for Greece, Portugal and Ireland before. Only this time, Europe won't be able to come to the rescue because Italy's economy is generally considered too big to bail out.
"The leader and his country are in danger of taking the rest of Europe, if not the world, into economic hell," said Louise Cooper, markets analyst at BGC Partners.
Monday's gyrations in the markets are being driven by Berlusconi's future. After early big falls, which came as Italy's ten-year borrowing costs rose to euro-era highs of 6.66 percent, stocks have recovered their poise amid speculation that Berlusconi was preparing to stand down. Milan's main stock market was outperforming all its counterparts in Europe, trading 1.8 percent higher at 15,630, while the ten-year yield dropped to 6.50 percent.
Elsewhere in Europe. France's CAC-40 was 0.1 percent higher at 3,126 while Germany's DAX rose a similar rate to 5,972. Britain's FTSE 100 underperformed, trading 0.5 percent lower at 5,497.
Wall Street was poised for a lower opening but less marked than earlier — Dow futures were down 0.3 percent at 11,908 while the broader Standard & Poor's 500 futures fell 0.4 percent to 1,246.
Investors want the Italian government to urgently pass measures to boost growth and cut debt. Italy's borrowing costs have skyrocketed since the summer, and that only makes it more expensive for the country to pay down its debt.
Greece has stepped back from the brink, promising to cobble together a unity government that looks like it will continue with reforms, but Berlusconi faces a confidence vote this week.
The finance ministers of the 17 countries that use the euro are meeting again later Monday, but it's not clear they'll have any more success than the G-20 did in Cannes, France.
The euro also recovered some lost ground amid speculation of Berlusconi's resignation. It was down 0.2 percent at $1.3756.
Earlier it fell below $1.37 — a 0.7 percent decline in retail sales in September in the 17 countries that use the euro didn't help, adding to fears that the eurozone is heading back into recession.
Oil prices tracked equities higher, with benchmark crude for December delivery up 21 cents to $93.73 a barrel in electronic trading on the New York Mercantile Exchange.
Earlier, Asian shares fell. Japan's Nikkei 225 index dropped 0.4 percent to close at 8,767.09. South Korea's Kospi lost 0.5 percent to 1,919.10 and Australia's S&P/ASX 200 was down 0.2 percent at 4,273.40.
Hong Kong's Hang Seng sank 0.8 percent to 19,677.89. Mainland China's benchmark Shanghai Composite Index lost 0.7 percent to 2,509.80 and the Shenzhen Composite Index lost 0.6 percent to 1,065.31.