Return of Berlusconi follows resignation of Mario to throw stock markets into turmoil

The spectre of another Berlusconi premiership panicked the financial markets today and saw Italy and the euro staring into the abyss again.

Within hours of opening, Milan's stock exchange had fallen nearly four per cent and Italy's borrowing costs shot up as markets tried to make sense of the chaotic political scene following Prime Minister Mario Monti's announcement at the weekend that he plans to resign. By close, Italy's main FTSE MIB stock index had fallen 2.2 per cent to 15,354.

"The underlying cracks within the eurozone are actually widening," Georg Grodzki, an analyst with Legal & General Investment Management in London, said. "Investors will be reading Italian politicians' lips very, very closely."

Mr Monti insisted he was not considering running for office in elections early next year, despite building speculation that he was planning to continue in government in some capacity. Mr Monti said on Saturday that he planned to step down after passing the 2013 budget.

"I am not considering this particular issue at this stage," Mr Monti, 69, said at a press conference in Oslo, where he joined other European Union leaders to pick up the Nobel Peace Prize. "All my efforts are being devoted to the completion of the remaining time of the current government, which appears to be a rather short time, but still requires an intensive application of my energies."

La Stampa newspaper had speculated he might attempt to form a new grouping in the political centre in an effort to continue his reforms, which have stabilised Italy's finances since he took over from Silvio Berlusconi's collapsing government 13 months ago. Other pundits have predicted that he will endorse another political grouping that backs his reforms or seek a high-profile position – perhaps economics minister in a centre-left government.

Today the ex-premier Mr Berlusconi – whose party prompted the current crisis by withdrawing its support in two votes last week – was attempting to mend ties with the anti-immigration Northern League, whose support he would desperately need in a centre-right coalition.

Over the past few months the 76-year-old media mogul has stepped up his populist attacks against the EU, Germany and austerity measures. Senior figures in Europe warned that Mr Monti's policies had to continue to avert the return of the crisis that brought him to power a year ago. Only then would a Greek-style collapse be averted, they said.

"Monti was a great Prime Minister of Italy and I hope that the policies he put in place will continue after the elections," European Council President Herman Van Rompuy said in Oslo.

The Spanish Finance Minister, Luis de Guindos, said that instability in Italy could spill over and put further strain on Spain's already-fragile public finances.

Yields on 10-year Spanish bonds also jumped on the news out of Italy, a sign of nerves among investors. "Everytime there are doubts … for example today, when there are uncertainties about the political stability of a neighbouring country such as Italy, that immediately affects us," Mr de Guindos said in an interview with Spanish state radio.

Mr Berlusconi's centre-right PDL (People of Freedom) party, which until last week appeared to be in a state of disintegration, has shown some signs of revival with the news that Mr Berlusconi will lead it in the February election.

But with the PDL lagging so far behind in the polls – it has just 18 per cent against the centre-left Democratic Party's 38 per cent – the tycoon's chances of winning a fourth election appear marginal at best.

The Democratic Party leader, Pierluigi Bersani, has stressed that he would stick to the Monti reforms introduced thus far.

Mr Berlusconi's best bet appears to be concentrating his forces on traditional centre-right strongholds such as Lombardy and Sicily in order to secure a majority in the Senate in the likely event of him losing the poll.

Meanwhile, a front-page editorial in the leading Corriere della Sera newspaper lamented that the period of relative calm brought by Mr Monti had lasted just 13 months, and the battle between pro and anti-Berlusconi forces was set to resume. "The war continues," the newspaper said. "The world looks at us, incredulous."