Italian assets had rallied in early trade after President Sergio Matarella rejected a eurosceptic candidate for economy minister.

But the relief rally proved short-lived, with investors concerned over the risk that fresh elections could deliver an even stronger mandate for Italy's anti-establishment parties.

"I suspect the market initially interpreted it as good news, but now they are considering what will happen in terms of an early election and with populists maybe gaining an even bigger share," said DZ Bank analyst Andy Cossor.

"And for some investors it's just the case of offloading the positions given the uncertainty," Cossor added.

Italy's anti-establishment 5-Star Movement is considering campaigning together with the far-right League if the country goes back to the polls, a 5-star source said.

Italian 10-year government bond yields, which move inversely to price, were up 8 bps at 2.53 percent, reversing earlier falls to be near last week's highs.

The Italian 2-year bond yield shot up 25 basis points to a three-year high of 0.72 percent, having been lower 14 bps at one point.

Italy's main stock index fell 1.6 percent by 1011 GMT, having surged at the open. Italian bank stocks were down 4 percent at their lowest in 13 months as investors looked to potential negative outcomes from likely fresh elections.

The euro also turned negative having been up as much as 0.6 percent earlier in the session.