Prime Minister-designate Mario Monti raced to assemble a new government for Italy on Tuesday while a sharp rise in French borrowing costs raised fears that the two-year debt crisis may spread to the euro zone's second biggest economy.
European shares and the euro fell on Tuesday as investors renewed selling of Italian and Spanish bonds and any relief from having new leaders in Italy and Greece proved short-lived with investors seeking safe-haven assets like German bonds.
Italy's 10-year bond yield rocketed back above 7%, pushing its borrowing costs to a level widely seen as unsustainable and which helped trigger the fall of Silvio Berlusconi's government last week.
Global markets harbour deep concerns about whether Monti and new Greek leader Lucas Papademos, unelected European technocrats without a domestic political base, can impose the needed tough austerity and far-reaching economic reform.
A think-tank report said the situation in triple-A rated France should also be "ringing euro-zone alarm bells" because of the country's inability to make rapid adjustments to its economy.
Germany and France posted solid growth in the third quarter, statistics released on Tuesday showed, but euro-zone nations on the front line of the debt crisis fared much worse and analysts expect bleaker times ahead in the core economies.
As the euro-zone's largest economy and growth engine for the past two years, any hiccups in the coming business quarters in Germany would have wider effects in the region.
A rebound in household consumption lifted France's growth to a better-than-expected 0.4% in the third quarter, after a contraction in the second, but economists warned it was just a lull before a likely return to recession.
