Antonio Calanni, Associated Press
A view of Milan's stock exchange headquarters is seen, Monday, July 11, 2011. Finance ministers gathered in Brussels are debating how to secure a private-sector contribution to a new Greek package and how to prevent the debt crisis spreading to bigger countries, including Italy.

MILAN — Italian financial markets slumped on Monday, with the spread between the 10-year bond yield and Germany's benchmark hitting a new record, as investors worried the country may become engulfed in Europe's debt crisis.

The spread hit 300 points at one point before edging back slightly. The interest rate on a 10-year Italian bond was 5.64 percent by late afternoon, more than twice the 2.67 percent rate for the German equivalent, considered the safest in the eurozone.

In an effort to keep speculators at bay, the stock market regulator set a limit on short-selling — when traders sell stocks they do not actually own in the hope of buying them back at a lower price.

The measure, which runs through Sept. 9, failed to support stock markets much, however, with Milan's FTSE MIB index closing down 3.96 percent.

Banks led the decline — Unicredit dropped by as much as 10 percent and Intesa Sanpaolo by 9 percent, before recovering a bit on closing. Fiat Industrial and Telecom Italian also were among the worst performers.

Italy's high debt of nearly 120 percent of GDP and poor growth prospects have made it vulnerable to the eurozone's debt crisis. Two ratings agencies have warned the country needs to get its public finances in order or risk a downgrade.

The government has introduced a €48 billion ($68 billion) austerity package, now in parliament, to balance the budget by 2014. The market's reaction has been skeptical, however, with stocks and bonds falling steadily since its presentation last week.

Germany Chancellor Angela Merkel on Monday expressed confidence Monday that Italy will push through the plan.

"I have firm confidence that the Italian government will approve just such a budget ... and, in so doing, Italy will send a signal that it feels committed to consolidation and fighting debt," she said. "The euro in itself is stable, but we have a debt problem in some countries."

Just as Italy needs to project a strong political front, a rift has appeared between Premier Silvio Berlusconi and his finance minister, Giulio Tremonti, raising the specter of political instability.

Berlusconi in an interview with La Repubblica last week said that Tremonti was not a team player.

"He thinks he is a genius and everyone else is an idiot," Berlusconi said. "I put up with it because I've known him for a long time and that's how he is."

Tremonti has been embarrassed by a corruption probe into the activities of a former aide, and last week issued a statement saying he was giving up housing the aide had offered him for the nights he spends in Rome. Tremonti also had to make up with another minister after a microphone caught him calling Renato Brunetta "an idiot" during a press conference presenting the austerity measures.

The two tried to paper it over with a meeting later in the day, issuing a statement saying they had worked on pressing issues including the austerity budget and the government's efforts to balance the budget.

Berlusconi has kept a low profile since an appeals court Saturday ordered his family's investment arm to immediately pay €560 million ($797 million) to a rival in a 20-year-old case involving corruption in the takeover of the Mondadori publishing house.