A crucial referendum will determine the future of Italian PM Matteo Renzi and could pave the way for a Euro-sceptic party determined to trigger a vote to leave the EU.
Italians will go to the polls on December 4 to vote on a proposal to change the constitution to dramatically reduce the powers of the upper house of parliament. There is a lot riding on the outcome: Italian Prime Minister Matteo Renzi has stacked his leadership on the issue, pledging to resign if the vote fails.
So far polls have indicated the December referendum will fail.
New elections could see the rise to power of the Five Star Movement, which has said it wants to hold an additional referendum on euro membership. The party is anti-globalisation and anti-establishment, with pro-environment and sustainability goals.
The proposed constitutional reform is considered by supporters to be the most important in the eurozone country since World War II.
It is aimed at increasing political stability in a country which has had 60 governments since 1946, by streamlining parliament and the electoral system.
But critics say it would strip Italy of vital democratic checks and balances put in place after World War II.
The referendum has become a vote of confidence in the centre-left prime minister who took office in early 2014 and experts say the fate of his administration hangs on the outcome.
Italy has been facing economic decline for some time, with the Italian stock market down approximately 23 per cent this year as growth slows and unemployment remains high.
Commerzbank chief economist Joerg Kraemer said Italy is currently the biggest risk to EU unity.
He cautions there would have to be several triggers over a period of months: first, a 'no' in the referendum, then new elections, and then a win by the Five Star Movement, according to AAP.
Kraemer and other analysts think a caretaker government is more likely, at least at first. But regular elections would be held in 2018 in any case.
He argues that a Five Star government would likely spend more money and bust the eurozone's rules limiting deficits, adding more debt to Italy's already heavy burden of 135 per cent of economic output.
More deficit spending and debt "will create a huge conflict with the fiscal rules and the European commission," Kraemer said.
"And in such an environment there is a significant risk that private bond investors will go on strike and refuse to buy Italian government bonds. That means there is a significant risk that we will see a return of the southern debt crisis if the Five Star movement continues to lead in the polls and there are early elections."
Italy also faces potential disruptions in coming weeks from troubled bank Monte dei Paschi di Siena.
The bank is trying to offload bad loans and raise new capital. If it fails, it could need a bailout from the government. But in that case new EU rules would trigger losses for some bond holders, including many small retail savers which would be political poison.
Italy's top chef and over 80 other celebrities, including tenor Andrea Bocelli and Oscar-winning director Paolo Sorrentino, backed PM Matteo Renzi's constitutional reform bid last Sunday.
Massimo Bottura, whose Osteria Francescana in Modena was named the world's best restaurant this year, said in an interview on the Corriere della Sera website that he might leave the country if the reform is defeated.
"If the 'No' wins I'll be tempted to abandon everything and move abroad. I'll thank my country, which has given me so much, I'll close up shop and re-open in New York," said Bottura, whose restaurant has three Michelin stars.
He blamed low morale in a country where the prevalent opinion was: "It can't be done in Italy".
"If that logic wins, it's over," he said.
Over 80 well-known figures also signed a petition calling for support for the 'Yes' camp, including World Cup-winning footballer Marco Tardelli and Turkish-Italian film director Ferzan Ozpetek.
-With AFP and AAP