The FTSE Italia all-share banks index was down 4.3 per cent in early trading in the country after the resignation of Prime Minister Matteo Renzi threatened another setback in the country's banking industry.
Renzi has been regarded as a key player in negotiating a €5bn(£4.2bn) rescue plan for Monte dei Paschi, the crisis-hit lender. His departure leaves the future looking uncertain for the country's banks, who between them are carrying a burden of €360bn of non-performing loans.
It is understood that the consortium of banks behind the underwriting of the plan will meet later today to discuss their next steps.
Italy's oldest bank has been struggling for some time. In the European Banking Authority stress test this summer, it was the only lender of all those examined that would have had its capital entirely wiped out by a sharp economic downturn.
"The chief risk at present is the banks and specifically the €5bn cash call by Monte dei Paschi di Siena which was due to start this week," said Neil Wilson, senior market analyst at ETX Capital.
"This now looks in grave danger and we have to consider a possible state rescue to shore it up and prevent contagion spreading. We can expect plenty of soothing words from Eurogroup ministers who meet today, as well as ECB chief Mario Draghi."
"Concern surrounding the health of the country’s banking sector may end up being the biggest concern in the coming days and weeks as recapitalisation plans for the country’s embattled financial institutions come into question," added Harry Croft, research analyst at Accendo Markets.
Shares in Monte dei Paschi fell three per cent to €18.92, while Unicredit, whose shares were suspended in August after it flopped in stress tests, fell 5.2 per cent to €1.98.
Meanwhile, Banco di Milano shares fell 5.2 per cent to €0.30, while Banco Popolare fell 5.1 per cent to €1.89.
While Monte dei Paschi was working to pull together its rescue package, Unicredit this morning confirmed reports that it was in exclusive negotiations with French asset manager Amundi for the possible sale €3.5bn of the lender's asset management division, Pioneer Investments.
The bank's new chief executive Jean-Pierre Mustier is due to unveil a turnaround plan for the lender next week, and there is some speculation that a €13bn rights issue could be on the cards.
Meanwhile, the pound rose above €1.20 for the first time since the summer as the euro fell against a basket of currencies.