Italy's PM Silvio Berlusconi is set to face a crucial vote on the budget, amid fears that Italy could be the next victim of the Eurozone debt crisis.
Borrowing costs for Italy's government have soared because of fears it may be unable to repay its huge debts.
On Monday, Mr Berlusconi, who has survived dozens of confidence votes during his tenure, dismissed reports he planned to resign.
Meanwhile, European finance ministers are due meet in Brussels for talks.
Concerns over Italy are overshadowing developments in Greece, where political leaders are wrangling over the formation of a new unity government to impose austerity measures in return for international loans.
Defections?Italian 10-year bond yields rose to a euro-era high of 6.67%, with markets viewing Italy's ability to repay its debt as increasingly doubtful.
While Italy's deficit is relatively low, investors are concerned that the combination of Italy's low growth rate and 1.9tn euro ($2.6tn) debt could make it the next to fall in the Eurozone debt crisis.
On Monday, Mr Berlusconi denied on Facebook reports that he was about to resign.
Stock markets across Europe bounced up on the chance of the Italian premier's departure but returned to negative territory at Monday's close.
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Correspondents says there is speculation that Mr Berlusconi no longer has a majority in parliament, after reports that some MPs from his government have defected.
Mr Berlusconi has remained defiant, insisting that his government has all the support it needs.
"I don't understand how rumours of my resignation are circulating," Mr Berlusconi was quoted as saying by Libero newspaper, AP reported.
But if Mr Belusconi were to lose the budget vote then it is hard to see how he could continue in power for long, says the BBC's Alan Johnston in Rome.
Our correspondent says is certainly worth remembering that Mr Berlusconi is a master deal-maker and political infighter, having survived more than 50 confidence motions in the past.
But this crisis is different as it goes beyond Italian politics - it is instead linked to the international money markets, which have lost faith in Mr Berlusconi ability to fix Italy's economy, our correspondent says.
The markets now forcing this country to pay interest rates that could eventually ruin it, which means the pressure on Mr Berlusconi is extraordinary, he adds.
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On Monday, finance ministers from the Eurozone met in Brussels to push ahead with a deal put together late last month.
After their meeting they called on the new government of Greece to approve in writing the terms of the international bailout in exchange for the release of the next tranche of funds.
They are also said they welcomed the monitoring of Italy to reassure the markets, and said they were seeking further clarification of when it would pass the economic reforms it has promised.
The European Union's Economic Affairs Commissioner Olli Rehn said he wants answers from Italy by the end of the week.
"It is essential now that Italy will stick to its fiscal targets, ensure their implementation and intensify the structural reforms that can boost growth," he said on Monday, according to AFP.
On Tuesday, finance ministers from all 27 EU countries will meet.
However, the BBC's Europe correspondent, Chris Morris, understands there will be no agreement on details of the expanded European Financial Stability Facility (EFSF) bailout fund.
Leaders have agreed in principle to boost the EFSF from its current 440bn euros (�375bn) to 1 trillion euros, in order to tackle debt problems in Italy and Spain.
Source: http://www.bbc.co.uk/go/rss/int/news/-/news/world-europe-15631265
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