The Italian stock market posted its biggest one-day fall in almost a year, and the financial regulator was forced to impose a short-selling ban on three banks as investors desperately offloaded stocks in response to the inconclusive election result in the eurozone's biggest debtor nation.
The Milan stock market sank by 4.9 per cent with Intesa Sanpaolo and Unicredit sliding by 9.1 per cent and 8.5 per cent respectively. Italy's market watchdog announced that it was banning short-selling in shares in Intesa, which is one of the country's biggest retail banks and a large holder of Italian government bonds, until Thursday. It also banned any short selling of smaller lenders, Banca Carige, and Banco Popolare for the same period.
Fears of a resurrection of the eurozone sovereign-debt crisis, which has been dormant since last summer, also hit Spanish stocks, with a 3.4 per cent slide in the Madrid exchange.
Both Italy and Spain – two of the most vulnerable eurozone states that have not yet received an official bailout from their EU neighbours – also experienced a spike in their borrowing costs. Spreads in their bond yields above German Bunds extended as well.
In a sign of official alarm at the unexpected Italian election result, the president of the European Commission, Jose Manuel Barroso, urged governments not to deviate from their deficit-reduction programmes in order to chase votes.
"I hope we are not going to follow the temptation to give in to populism because of the results in one specific member state," he said at a Reuters summit in Brussels.
However, there were some more comforting noises for investors from the other side of the Atlantic, as the chairman of the Federal Reserve, Ben Bernanke, suggested that the US central bank will carry on with its policy of monetary stimulus.
"Monetary policy is providing important support to the recovery while keeping inflation close to the 2 per cent objective," Mr Bernanke told the Senate banking committee in Washington.
He played down concerns voiced by other Fed members of the dangers of monetary stimulus.
"In the present circumstances [low rates] also reduce risk in the system, most importantly by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses," he said.
Economic data from the US was also seized as a sign that the world's largest economy is recovering from its surprise modest contraction in the final quarter of 2012. New home sales rose by 16 per cent in January, the highest rate of growth since July 2008. Meanwhile, the Conference Board index of consumer sentiment climbed to 690.6 in February, the healthiest level since November. This positive news sent the Dow Jones up 107 points shortly after opening.
Nevertheless, there remain some nerves in the US over the $85bn (£56bn) of automatic spending cuts, known as the Sequester, due to be implemented at the end of this week. Investors are hoping that Democrats and Republicans in Congress will reach a political deal that prevents the cuts taking effect and derailing the recovery.