The prospect of Italian premier Silvio Berlusconi stepping down teased investors back to the market today although concerns remain over his country's increasingly fragile finances.
Mr Berlusconi, who is struggling to pass economic reforms to tackle Italy's debt pile, denied he was set to resign, but the rumours saw the FTSE 100 Index claw its way out of the red to stand 0.2% higher.
Wall Street's Dow Jones Industrial Average was also up despite Italy's borrowing costs soaring into "bailout territory" as investors lose confidence in the country's ability to pay its debts.
The developments in Italy, which is the eurozone's third-largest economy and has debts worth 120% of national income, pulled focus away from Greece, where prime minister George Papandreou resigned.
Kathleen Brooks, research director at Forex, said rumours of the Italian prime minister's resignation and retractions were likely to continue to trigger volatility on the markets.
She said: "Either way, the end seems to be getting closer for Berlusconi and it is getting harder for Italy to avoid a bailout."
The yield on Italian 10-year bonds rose from 6.37% to a euro-era high of 6.64% amid increased political uncertainty as Mr Berlusconi prepares for a crunch vote on public finances.
Investors retreated from the markets earlier amid fears the country would follow Greece, Ireland and Portugal in needing a bailout from the EU and IMF.
Ms Brooks added: "It's hard to see how investors can live with Italy on the cusp of a bailout, so risk is likely to remain under pressure in the near term."
The banking sector continued to come under pressure despite the turnaround on the wider market, with Lloyds Banking Group down 2%, Barclays falling 1% and Royal Bank of Scotland off nearly 3%.
Elsewhere in Europe, Germany's Dax and the Cac-40 in France edged back into the black.
The surging borrowing costs in Italy are the latest twist in the continuing debt crisis in Europe, which has dominated the markets for weeks.
The country's parliament will hold a vote tomorrow on a raft of austerity measures - also viewed as a confidence vote in Mr Berlusconi.
Greece was previously at the forefront of investor concerns after Mr Papandreou announced shock plans to hold a referendum on a crucial eurozone rescue deal.
Mr Papandreou reneged on his pledge and, despite surviving a confidence vote on Friday, has resigned amid chaos over his handling of his country's part in the debt crisis. A leader for the new Greek government will be unveiled later.
Meanwhile, traders nervously await the outcome of a meeting of eurozone finance ministers, who are likely to discuss the next tranche of bailout funds for Greece and the worsening situation in Italy.
Elsewhere, the underlying problems in the eurozone were highlighted by figures showing a sharp fall in retail sales volumes in September.
Governments across the region are struggling to roll out tough austerity measures to tackle rising debt while their economies are stagnating.
The uncertainty benefited safe haven stocks, with the price of gold 1.5% higher at $1782.1 an ounce.