Italy's central bank chief warned has the state was "only ever a few short steps" from losing investors' trust as markets dumped stocks and bonds.
Prime minister-designate Carlo Cottarelli is set to unveil his cabinet on Tuesday, as tensions between the country's president and the two political parties he sidelined flared.
Cottarelli, a former International Monetary Fund official who President Sergio Mattarella chose on Monday to head a stop-gap government leading to early elections, was due to meet the head of state in the afternoon.
The anti-establishment 5-Star Movement and the far-right League, the biggest winners from inconclusive elections in March, abandoned plans to form a coalition government at the weekend after Mattarella vetoed their choice for economy minister, an 81-year-old who has argued for Italy to leave the euro.
Investors believe Cottarelli will fail to muster support to pass a budget, leading to repeat elections in the autumn when the two eurosceptic parties could return with even larger representation in parliament.
These worries sent Italian stocks to their lowest level since July 2017, dragged down by a heavy selloff in financial stocks on Tuesday. The spread between Italy's 10-year bund and its German equivalent grew further to touch more than 270 basis points from Monday's 235 close, its highest since September, 2013.
The continuing uncertainty in the eurozone's third biggest economy also helped the euro tumble to fresh multi-month lows. Investors had already worried about the proposed coalition's ambitious spending program for a country which already has the third highest public debt in the world - plans that were likely to bring it into conflict with the European Union.
Bank of Italy chief Ignazio Visco said any move to weaken the country's public finances could undermine confidence and years of valuable reforms.
Italy's high debt as a proportion of its annual economic output could expose it to dangerous crises of confidence, he told the central bank's annual meeting.
Cottarelli, whose simplicity startled reporters on Monday when he arrived at the presidential palace by taxi carrying a backpack, was preparing a slimed-down cabinet of experts with no direct links to political parties to steer the country to elections.
When he accepted the mandate, Cottarelli vowed that he and his cabinet would step aside after their job is done and not seek political office in the next elections.
