Italian premier Mario Monti has seen nearly seven months of confidence-building efforts by his government wiped out as a debt auction revealed that the country's borrowing rates are back near levels last seen in December.
A sale of 12-month bonds, a warm-up for Thursday's weightier long-term debt auction, demonstrated the speed with which market jitters spread from Spain following Madrid's weekend concession that its banks need a bailout.
Italy paid an interest rate of 3.972% - up from 2.34% in a similar auction last month - to borrow 6.5 billion euro (£5.23 billion) in 12-month money from bond markets. Though demand was strong, the high rate suggests investors worry Italy may need a rescue of its own if Spain takes one.
"Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain's request for external assistance," said sovereign debt expert Nicholas Spiro. Markets, he noted, are no longer differentiating fiscally-stronger Italy from Spain, "which is a sign that panic has set in".
Just before the sale, Mr Monti urged politicians to speed the pace of reforms in a bid to persuade sceptical investors - whom he referred to as "observers that don't nurture an innate sympathy for our country"- that Italy was willing to make the necessary sacrifices to escape the debt crisis.
Although Italy's deficit is relatively low, at 3.6% of GDP compared with Spain's 8.5%, the economy is not growing and overall debt is huge, at 1.9 trillion euro (£1.5 trillion). To lower that debt, the economy needs to become more competitive.
That has been Mr Monti's task since taking office in November. His technocratic government passed a package of tax rises and spending cuts in December, and has been moving ahead with structural reforms but has found resistance from both lobbies and politicians alike.
The premier also made it clear that a broad European action plan is needed to avoid a spread of market panic from Spain to other countries like Italy, calling for concrete measures to be agreed at a June 28 EU summit.
Mr Monti backed measures such as eurobonds, jointly issued European debt that would spread risk across countries, but which Germany has firmly opposed.
He said they would not need to be introduced this year, but plans should be put in place.