The plunge in Italian markets overshadowed policy makers' efforts to fix Greek finances as the euro-region's debt crisis infected Europe's largest borrower.

Italian bonds fell for a seventh day and the nation's borrowing costs jumped by more than half at an auction of 6.75 billion euros ($9.4 billion) of bills today. Stocks pared declines after falling to a two-year low. Warnings by Moody's Investors Service and Standard & Poor's over Italy's ability to trim debt, coupled with infighting in Silvio Berlusconi's government over a budget-cutting plan, fueled the sell-off.

“Italy coming under severe market pressure, being the third-largest economy and a founding member of the EU, signals that the sovereign and banking crisis has reached a deeply systemic phase,” Vladimir Pillonca, an economist at Societe Generale SA in London, wrote in a note to investors today.