Italy, the world's eighth largest economy, overtook Greece as the prime threat to the stability of the 17-country single currency zone, as finance ministers met to try to find ways of building a firewall around the two-year-old crisis.
Italian 10-year bond yields rose to their highest since 1997 -- approaching levels regarded as unsustainable -- with political turmoil in Rome threatening to drag a fourth European economy after Greece, Ireland and Portugal into the debt mire.
Jean-Claude Juncker, the chairman of Eurogroup finance ministers, said the European Central Bank would take part in monitoring Italy's promised economic reforms along with the European Commission and the International Monetary Fund, effectively putting the country under full surveillance.
Greece's outgoing socialist prime minister and conservative opposition leader rushed to put in place an interim national unity government for just long enough to save their country from imminent default by implementing a new bailout program.
France announced new austerity measures designed to preserve its wobbly AAA credit rating, without which the euro zone might no longer be able to bail out its weakest members.
In Brussels, euro zone finance ministers agreed a detailed mandate to scale up the currency zone's rescue fund by the end of November to shield vulnerable but solvent economies such as Italy's and Spain's from a possible Greek default.
In Rome, Prime Minister Silvio Berlusconi defied huge pressure to resign as he struggled to hold a crumbling center-right coalition together after being forced to accept intrusive IMF surveillance of his economic reforms.
Political sources said leaders of Berlusconi's PDL party had urged him to resign late on Sunday but he was resisting.
Juncker stopped short of calling for a national unity government in Italy, saying it wasn't under EU/IMF protection.
"What we are expecting from Italy is that Italy will implement all the measures which have been announced in Silvio Berlusconi's letter," he said after the finance ministers' meeting, referring to a letter sent last month that set out plans for pensions reform and deregulation.
Stocks fell worldwide on the uncertainty, but Italian shares ended higher, partly on hopes that Berlusconi could soon be gone, traders said.
A cabinet minister said Italy would face early elections if party rebels stripped Berlusconi of his majority in a crunch vote on public finances in parliament on Tuesday.
"If we have the majority we'll carry on, otherwise there'll be elections," Gianfranco Rotondi, a minister without portfolio, said after meeting Berlusconi at his Milan home.
Former European Central Bank vice-president Lucas Papademos was on his way to Athens, tipped to head a transitional Greek cabinet charged with pushing a 130 billion-euro (USD 170 billion) bailout plan through parliament to secure a crucial 8 billion-euro aid tranche before early general elections in February.
A Greek government spokesman said talks on finding a new prime minister were continuing in a good spirit, indicating no decision had been reached. The Greek cabinet will convene at 5 a.m. ET on Tuesday to discuss developments.
A senior opposition source said Finance Minister Evangelos Venizelos and his top economic team would stay for continuity.
Whoever leads the temporary Greek administration will face a monumental task in restoring order to a country of 11 million whose chaotic economy and politics are shaking international confidence in the entire euro project.
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