Mr Prodi is facing defeat of his 1998 budget by his hard-left allies in the worst crisis since his centre-left coalition took power in May 1996. The assault on Italian financial assets sparked calls for fresh elections.
Italy's all-share Mibtel Index shed 466, or 2.9 per cent, to 15,403, its worst one-day drop in 19 months. Futures on Italian bonds for December settlement in London dropped 0.56 to 111.40, and the Italian lira tumbled to 980.0 lire per German mark from 977.1 lire.
Some stock and bond investors, though, said they still expect Mr Prodi's government to survive and bring the budget deficit below 3 per cent of the gross domestic product - a pre-condition for joining EMU in 1999.