LONDON, Sept 30 (Reuters) - Italian government bond yields jumped on Monday after five ministers from former premier Silvio Berlusconi's party stepped down at the weekend, increasing the risk of new elections.
The resignations were set off by clashes at a Friday cabinet meeting over an imminent sales tax hike.
Italian Prime Minister Enrico Letta will go before parliament on Wednesday and hold a confidence vote to verify what is left of his parliamentary backing. President Giorgio Napolitano began talks on Sunday to solve the crisis.
Tensions have been running high in Letta's left-right coalition ever since last month, when Berlusconi was convicted of tax fraud. His allies have threatened to bring the government down if he was ousted from parliament following his conviction.
BTP futures opened 112 ticks lower at 109.23. They later hit a two week low of 108.79.
"I don't think markets expected Italy to hold early elections ... I think this is where we're going," one trader said.
German Bund futures opened 33 ticks higher at 140.78, with the risk of a U.S. government shutdown also supporting a shift into the perceived safety of top-rated bonds.
On Sunday, the Republican-controlled House of Representatives passed a measure that ties government funding to a one-year delay of President Barack Obama's landmark healthcare restructuring law, while Senate Democrats have vowed to reject it.