Italian bond yields ticked higher on Tuesday, closing in on unsustainable levels as lawmakers in Rome readied for a crucial vote on public finances that marks the latest chapter in the euro zone debt crisis.
The euro slipped against the dollar but European shares rose on upbeat company earnings.
Investors shifted their attention from Greece -- where attempts were still under way to form a consensus government to keep the country in the euro zone -- to Italy, where Prime Minister Silvio Berlusconi is under intense pressure to resign.
Ten-year Italian bonds were yielding more than 6.7 percent, closing in on the 7 percent level that prompted Ireland and Portugal to seek bailouts.
Deep political divisions over the euro zone third-largest economy have spooked investors.
Barclays said in a note that current yield levels were "clearly unsustainable". But it added that even if Italy enacts its planned budget reforms they may not be enough to stabilise financial markets.
"Historical experience suggests that the self-reinforcing negative market dynamics that now threaten Italy are very difficult to break," it said in a note. "At this point, Italy may be beyond the point of no return."
The crisis, however, was having little impact on stock markets.
The pan-European FTSEurofirst 300 was up 0.8 percent after two sessions of losses, lifted by pleasing corporate earnings.
"Companies have beaten expectations, but that is against lowered expectations," Jeremy Batstone-Carr, strategist at Charles Stanley, said, adding: "One of the features of the autumn has been the extent to which the macro picture has trumped the corporate picture."
The Swiss franc weakened as the threat of intervention hit demand for the safe-haven currency.
It extended the hefty losses sustained on Monday after the country's central bank stepped up warnings of more action to curb the currency's strength if needed. The Swiss National Bank capped the franc at 1.20 francs per euro in September and vowed to defend that level with all means necessary.
The euro rose 0.2 percent against the Swiss franc but was weaker against the dollar.
With the anxiety surrounding one of the world's biggest sovereign bond markets, the euro shed 0.1 percent to $1.3762 , down from $1.3773 late in New York and well off a 2-month high of $1.4248 hit on Oct. 27.