Europe backs Monti as Italy crisis hits markets

European partners urged the next Italian government on Monday to stick to Prime Minister Mario Monti's reform agenda, after his decision to resign early and Silvio Berlusconi's return to frontline politics rattled financial markets.

Monti's surprise weekend announcement that he would quit because Berlusconi's People of Freedom party had withdrawn its support for his government pushed up Italy's borrowing costs and prompted a stock market sell-off.

The campaign for an election expected in February is likely to be fought over Monti's reform agenda which Berlusconi, his predecessor as prime minister, said had condemned Italy to recession and forced him reluctantly to run for a fifth term.

By contrast European politicians and officials warned that Monti's policies must continue to prevent a return of the crisis which brought him to power a year ago, when he was charged with rescuing the euro zone's third biggest economy from the threat of a Greek-style collapse.

"Monti was a great prime minister of Italy and I hope that the policies he put in place will continue after the elections," European Council President Herman Van Rompuy said in Oslo, where he was part of a EU delegation receiving the Nobel Peace Prize.

The comments echoed similar remarks in the past two days from policymakers ranging from French Foreign Minister Laurent Fabius to the head of the European bailout fund Klaus Regling and European Commission President Jose Manuel Barroso.

Spanish Economy Minister Luis de Guindos warned that instability in Italy could spill over and put Spain's fragile public finances at risk of further turmoil.

Attention is now focused on whether Monti will enter politics himself, either as a candidate or by endorsing one of the centrist forces that have backed his reforms and made more or less explicit pleas for him to run.

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