If Italy slows down or abandons its austerity program it could undermine investors' confidence in the country's ability to get its economy going again and revive worries over the viability of the region's shared currency, the euro.
Italy's main stock index dropped 3.8 percent Tuesday. The yield on Italy's benchmark government bond rose sharply, to 4.76 percent from 4.43 percent, as investors sold them. That's still far below the 7 percent the yield traded at in January 2012, when confidence in Italy's finances was far lower. The euro was little changed against the dollar.
Other European indexes also fell, but not as much. Stocks fell 1.6 percent in Germany, 1.8 percent in France, and 1.1 percent in Britain.
In U.S. government bond trading, the yield on the 10-year Treasury note edged up to 1.87 percent from 1.86 percent late Monday.