Stocks recovered from big losses and Italy's borrowing costs eased from euro-era highs hit earlier on Monday on speculation that Italian Premier Silvio Berlusconi could soon resign.
Following last week's turmoil centered on worries that Greece was heading for an imminent bankruptcy, investor fears are now focused squarely on Italy, the eurozone's third largest economy. Italy is also the third-biggest debt market in the world.
If its cost of borrowing rises too much, Italy wouldn't be able to raise the money it needs to roll over its debts, threatening the European banking system and the global economy.
Greece, Portugal and Ireland required international bailouts when they were unable to raise money on financial markets. Italy, however, would be too expensive to bail out.
"The leader and his country are in danger of taking the rest of Europe, if not the world, into economic hell," said Louise Cooper, markets analyst at BGC Partners.
Monday's gyrations in the markets are being driven by Berlusconi's future. After early big falls, which came as Italy's ten-year borrowing costs rose to euro-era highs of 6.66 percent, stocks have recovered their poise amid speculation that Berlusconi was preparing to stand down.
Though he denied that he's about to go, Milan's main stock market was outperforming all its counterparts in Europe, trading 2.5 percent higher. The ten-year yield was trading at 6.45 percent, still up 0.2 of a percentage point from Friday but not as high as in the morning.
Elsewhere in Europe, France's CAC-40 was flat at 3,124 while Germany's DAX rose 0.3 percent to 5,980. Britain's FTSE 100 was 0.1 percent higher at 5,533.
In the U.S., the Dow Jones industrial average was 0.2 percent higher at 12,009 while the broader Standard & Poor's 500 index rose 0.1 percent to 1,154.
Investors want the Italian government to urgently pass measures to boost growth and cut debt. Italy's borrowing costs have skyrocketed since the summer, and that only makes it more expensive for the country to pay down its debt.
Greece has stepped back from the brink, promising to cobble together a unity government that looks like it will continue with reforms, but Berlusconi faces a confidence vote this week.
The finance ministers of the 17 countries that use the euro are meeting again later Monday, but it's not clear they'll have any more success than the G-20 summit of world leaders did in Cannes, France last week.
The euro also recovered ground amid speculation of Berlusconi's resignation. It was up 0.1 percent at $1.3794.
Earlier it fell below $1.37 _ a 0.7 percent decline in retail sales in September in the 17 countries that use the euro didn't help, adding to fears that the eurozone is heading back into recession.
Oil prices tracked equities higher, with benchmark crude for December delivery up $1.28 to $95.54 a barrel in electronic trading on the New York Mercantile Exchange.
Earlier, Asian shares fell. Japan's Nikkei 225 index dropped 0.4 percent to close at 8,767.09. South Korea's Kospi lost 0.5 percent to 1,919.10 and Australia's S&P/ASX 200 was down 0.2 percent at 4,273.40.
Hong Kong's Hang Seng sank 0.8 percent to 19,677.89. Mainland China's benchmark Shanghai Composite Index lost 0.7 percent to 2,509.80 and the Shenzhen Composite Index lost 0.6 percent to 1,065.31.
Pamela Sampson in Bangkok contributed to this report.