European stocks and the euro tumbled on Wednesday as Italy's borrowing costs soared despite Silvio Berlusconi's shock pledge to resign as leader of the third biggest eurozone economy.
After rising strongly at the start of trading and following gains for Asian stock markets in the wake of Berlusconi's offer, European equities headed south as the yield on benchmark 10-year Italian bonds soared above the red-line 7.0 percent level.
"The Italian bond market is in distress," said Kathleen Brooks, an analyst at traders Forex.com.
"Although Berlusconi promised to resign after the passage of austerity reforms get through parliament, the bond market may be reacting to the potential for a fractious coalition government getting in to power, which could only exacerbate Italy's fiscal situation," she added.
In midday trade, London's FTSE 100 index lost 1.53 percent to 5,483.27 points, Frankfurt's DAX 30 slumped 2.37 percent to 5,820.32 points and in Paris the CAC 40 dropped 2.30 percent to 3,071.23.
Italian stocks dived 4.0 percent as traders looked past Berlusconi's announcement in Rome late Tuesday that he would resign once a law with reforms aimed at calming the eurozone turmoil was adopted as expected this month.
One of the biggest drags on the Italian stock market Wednesday was shares in Berlusconi's Mediaset business empire, which were down around 10 percent.
Markets have been punishing Italy for weeks over what is seen as Rome's inability to make the necessary changes to balance the budget and keep on top of its debt, which is equal to 120 percent of gross domestic product.
As Italy looked to an uncertain future, Greece's stock market dropped by more than 3.0 percent as politicians there squabbled over an interim prime minister to lead a crisis team to haul it back from the brink of disaster.
Berlusconi's move came just a few days after George Papandreou, the Prime Minister of debt-plagued Greece, said he would step aside and allow a unity government to take over in a bid to drag the country out if its financial mess.
Greece's central bank chief on Wednesday said it was "imperative" for the squabbling parties to iron out differences and quickly decide on a unity government as the country faced bankruptcy.
George Provopoulos said a coalition must be formed to implement the terms of a painstakingly agreed EU deal that would give Greece huge bailout loans and guarantees and forgive part of its debt mountain -- in return for austerity.
The acute tensions surrounding Greece and Italy pushed the euro down to $1.3718 from $1.3836 late in New York on Tuesday. The dollar dipped to 77.67 yen from 77.70 yen. Gold fell to $1,783 an ounce from $1,795.
Credit Agricole warned in a note that the euro would stay under pressure and markets on edge until the political deadlock in Italy and Greece was resolved.