ROME (AP) — Italy's stock market fell sharply and its borrowing costs jumped Monday as investors and European leaders worried over the country's political and financial future following Premier Mario Monti's surprise decision to resign.
Led by plunging bank shares, the country's main stock index, the FTSE MIB, was down 2.5 percent at 15,313 in afternoon trading. The interest rate on the government's 10-year bond — an indicator of how risky investors consider a country's ability to pay down its debt — rose 0.33 percentage points to 4.8 percent.
Monti said Saturday he would resign earlier than expected after Parliament passes the state 2013 budget, saying it was impossible to continue after the political party of former Premier Silvio Berlusconi withdrew its support in two crucial votes last week.
"This decision has clearly been met with anxiety in the markets, with Monti's government seen as imperative to Italy's stability," Craig Erlam, market analyst for London-based Alpari, said in a note.
Monti's departure, expected later this month, means Italy is on course to hold its general elections in February, as much as two months early. Berlusconi announced over the weekend that he would run for a fourth term, although his Freedom People party is lagging in the polls.
Monti was tapped by Italy's president to lead the country in late November 2011 after Berlusconi resigned, having lost the confidence of international markets in his ability to save the country from a Greek-style debt crisis. Monti, a respected economist and former European Union commissioner, won back a degree of international credibility for the country through a series of tax hikes and fiscal reforms that were deeply unpopular at home.
Monti's political future remains unclear. Leaders of small, centrist parties have been wooing him to come onto their ticket. Prior to announcing his intention to resign soon, Monti had ruled out running for office but indicated he might accept some role in government if asked.
European leaders, who collectively sighed in relief when Monti was appointed, did not hide their concern over news that he was leaving prematurely and that Berlusconi, with his personal scandals and legal woes, was back in the political fray.
"Italy has two-thirds of the route of reform behind it, but the final third is now decisive and so a halt to the policy of reform would entail not just a significant weakening of Italy, but also could bring new turbulence to Europe," German Foreign Minister Guido Westerwelle told reporters in Brussels. "So my appeal to all of those in positions of responsibility in Italy is to be aware of their responsibility not just for Italy but for all of Europe."
The EU Commission, for its part, stressed the need for Europe to have a "strong and stable Italy," where fiscal reforms continue, according to spokesman Alejandro Ulzurrun de Asanza y Munoz.
Analysts had predicted a market selloff Monday, even though Berlusconi's conservatives trail in the polls and Italy's center-left Democratic Party, which is expected to win February elections, has pledged to continue with Monti's reforms.
The interest rates on Italy's 10-year bonds had dropped highs of nearly 6.4 percent in July to 4.37 percent two weeks ago. The drop was mainly due to the offer from the European Central Bank to help reduce a country's borrowing costs by buying up unlimited amounts of short-term debt.
If Monday's financial and political turmoil weren't enough, a related drama unfolded in a Milan courtroom, where Berlusconi is on trial for allegedly paying for sex with an underage Moroccan woman and then using his office to cover it up. He and the woman deny the accusations.
The woman, Karima el-Mahroug, was due to testify Monday but failed to show up, telling her lawyer in a text message that she was out of the country and giving no indication when she would return, news reports said.
Prosecutor Ilda Boccassini, who has waged other legal battles against Berlusconi, immediately concluded in court that el-Mahroug, known as Ruby, had been kept away by Berlusconi's defense to delay the trial until after elections.
Berlusconi attorney Niccolo Ghedini shot back, calling Boccassini's allegation "defamatory" and telling reporters he had already trimmed back his witness list to not drag out the trial.
The Ruby trial stems from alleged encounters at the so-called "bunga bunga" parties that Berlusconi would throw at his villas — a scandal that helped bring about his downfall last year.
In his many legal battles, the billionaire media mogul has frequently seen the statute of limitations expire. In addition, during his three elected terms as premier, Berlusconi's forces in parliament frequently pushed through legislation designed to help him and his allies in the courts.
In October, a Milan court convicted Berlusconi of tax fraud in connection with dealings in his media empire and sentenced him to four years in prison. He is appealing. Convictions don't become final in Italy until after two levels of appeals are exhausted.
A conviction in the Ruby case would be another blow, since a verdict was expected as early as January, just before the election.
Media speculation has been rife on the reasons for Berlusconi's return.
Some contend that, among other things, he was irked by a recent measure banning anyone from running for office who had been sentenced to more than two years in prison after convictions are upheld in cases of terrorism, organized crime and offenses in public office, including corruption.
Corriere della Sera columnist Antonio Polito seemed almost ashamed by Berlusconi's maneuvering, lamenting in a front-page editorial that the Monti "armistice" had lasted just 13 months.
"The war continues. The world looks at us, incredulously," he wrote.
Luca Ricolfi, a columnist for La Stampa, had criticized Monti for concentrating too much on reducing the budget deficit through tax increases. Still, he said, "I don't know if Monti has saved Italy but I am certain that without him we would be worse off today than we are."
Geir Moulson in Berlin contributed.
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