Italian stocks plunged 7.07 percent on Tuesday amid concerns that Italy could be dragged further into the escalating eurozone debt crisis, local media said.
The spread between Italian and German bonds at one time reached the record of 459 basis points, close to its highest ever level of 6.397 percent seen last August, when the ECB first began buying Italian bonds.
Shares in the country's biggest bank, Unicredit, were down 12.44 percent as Italy's second-biggest lender Intesa Sanpaolo dropped 15.80 percent, and Monte dei Paschi di Siena bank 10.20 percent.
Car maker Fiat also suffered, plunging 9.46 percent, while insurer Fondiaria-SAI was down 11.50 percent.
On foreign exchange markets, the euro fell more than one percent versus the dollar and yen, as investors cut exposure to the common currency, fearing a disorderly default.
Analysts say investors feared that attempts to get countries such as China and Brazil to fund an enhanced eurozone rescue fund will hit a major barrier.
Italian markets were hit hard by a surprise call by Greek Prime Minister George Papandreou on Monday that Greece would hold a referendum on the EU's latest bailout deal for the debt-laden country.
The announcement cast doubt on the eurozone's plan to hand Athens 130 billion euros (178 billion U.S. dollars) and arrange a 50-percent write-down on its towering debt.
The plan was intended to be EU's third comprehensive solution this year to a debt crisis that has already seen three countries bailed out.
But Papandreou said if the Greek people do not want the deal that is designed to slash the country's debt by nearly a third, it would not be adopted.
The announcement raised the possibility of a disorderly default, thus throwing into chaos the eurozone's attempts to stop the debt crisis spreading to more significant economies such as Italy.
In fact, according to analysts, Italy has come under increasing pressure from investors, who fear that the burden of government debt, coupled with low economic growth and increasing political paralysis, could jeopardize its ability to repay its debts.
On Tuesday, Italian Prime Minister Silvio Berlusconi said the Greek plan to hold a referendum on its international bailout "weighs heavily" on markets, as "it is an unexpected decision that triggers uncertainty," according to ANSA news agency.
Italy has put forward austerity measures amounting to more than 100 billion euros (137 billion dollars) since July in an attempt to stem contagion from the euro-area debt crisis.
The Italian prime minister also said in a statement that the Italian government was working on putting the measures into operation, and will present them at the upcoming G20 summit in Cannes, France.
The government's decisions, the statement said, will be applied with the "determination, rigor and haste that the situation imposes."