Italian bond yields have risen ahead of the crunch deadline for Italy to revise its rejected budget plan as fears grow around one of its major banks.
The euro has also fallen despite reports that Italy's finance minister Giovanni Tria is reportedly set to revise the budget's growth forecast to reach a compromise with the European Commission.
Italian 10-year bond yields jumped to 3.44 per cent heading towards a 10-week high of 3.461.
To make matters worse shares in Italy's Banca Carige have been suspended on reports the bank is set to announce a €400m capital hole.
Other banks are reportedly rush to the ailing lender's aid to prevent the sector destabilising.
The Italian Government has until tomorrow to submit a revised draft budget plan to the European Commission in a deadline imposed by the bloc.
European Commission president Jean-Claude Juncker hinted, on the eve of the deadline, that a compromise was unlikely.
He said: “The Italians are moving away not just from what they have promised us but also away from the minimum requirements of the stability pact.”
It could begin disciplinary measures, which could eventually include fines, against Rome later this month if a new budget meeting its rules does not come forward.
The commission rejected Italy's budget plan last month and said its breached EU rules – its first rejection of a member state's fiscal plan.
It said Government spending was too high and the deficit would rise instead of fall and debt would not fall in line with EU rules.
Last week the commission produced its own economic forecast, which contradicted Italy's predictions contained in its budget.
The commission predicted Italy's budget would push its deficit to 2.9 per cent of GDP in 2019, rather than the 2.4 per cent estimated by Rome, and that it would rise to 3.1 per cent in 2020 against Italy's 2.1 per cent estimation – above the bloc's limit.
Its forecast of 1.2 per cent GDP growth in 2019 was also lower than Italy's 1.5 per cent.
Italian newspaper La Repubblica reported that Italy could now revise its GDP growth forecast for next year to one per cent, citing a Government source, while another newspaper Il Messaggero said it would be cut to 1.2 per cent.