Italy had to pay record rates to raise 10-billion euros ($13.2-billion) on Friday after France and Germany warned that a blow-out in its giant debt mountain would signal "the end of the euro."
The EU's Economic and Monetary Affairs Commissioner Olli Rehn meanwhile ratcheted up the pressure further on Prime Minister Mario Monti's new government, calling for "an ambitious timeline" on economic reforms.
"Italy is faced with formidable challenges," Rehn told Italian lawmakers during a visit to Rome. "The new government needs to deliver on fiscal consolidation and adopt bold measures to re-launch growth," he said.
"Full and effective implementation will be key," he said, adding: "It would be essential to give strong signals to citizens and markets with a clear and ambitious roadmap for reform and an ambitious timeline."
In its bond auction, Italy was forced to pay a rate of 6.504 percent on bonds due in six months and of 7.814 percent on bonds due in two years -- dangerous levels that analysts say could drive Italy insolvent within months.
A day after a summit in Strasbourg with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Monti's press office reported the two leaders had said a debt collapse in Italy would be "the end of the euro."
Merkel and Sarkozy "said they were aware that a collapse of Italy would inevitably be the end of the euro, stalling the process of European integration with unpredictable consequences," it said in a statement.
Monti promised the two leaders that further fiscal consolidation in Italy "will be implemented rapidly with measures to boost growth."
"Sarkozy and Merkel expressed their full confidence" in Monti, it added.
Italy's debt emergency has set off alarm bells around the world over concerns that it could break the eurozone and the Milan stock market plunged sharply after the bond said, with the benchmark FTSE Mib index down 1.91 percent.
Other European markets were also struggling and Asian stocks closed mostly down while the euro tumbled to a seven-week dollar low
"Europe is worrying investors more than ever," forex trader Saxo Bank said.
Investors were fretting over the apparent failure of proposals to introduce Eurobonds -- which would help weaker eurozone economies by spreading the risk -- and turn the European Central Bank into a lender of last resort.
The Strasbourg mini-summit reinforced this concern by highlighting differences on finding a solution to the debt turmoil that is gripping Europe.
Concerns about Europe's health were underscored on Wednesday when Germany drew bids of only 3.9 billion euros for a six-billion-euro bond auction.
"The recent developments in euro-area sovereign debt markets suggest that contagion is spreading from peripheral countries to the so-called core countries. Export markets could also turn out weaker than expected," Rehn said.
The commissioner was set to meet with Monti, who was installed on November 16 after market pressures and a parliamentary revolt ousted his predecessor Silvio Berlusconi, at 1430 GMT and hold a press conference at 1600 GMT.
Italy has been forced to agree to auditing of its books by the European Union and the International Monetary Fund and the European Commission has said more austerity measures may be needed to balance the budget by 2013.
A first report from the monitoring mission was due on Tuesday, Rehn said.
Italy, the eurozone's third-biggest economy after Germany and France, passed two budget austerity packages earlier this year when fears over its giant debt and sluggish economic reforms began rattling the markets.
Technocrat Monti, himself a former top European Union commissioner and economics professor, has promised rapid action to slash the debt and boost growth and has wide public support but has yet to launch concrete reform plans.