Italy’s worst fears may now have been realised.

After turbulent trading late last week, Italy’s financial markets slumped again on Monday.

Milan’s FTSE MIB index fell 3.96% and the spread between the 10-year bond yield and Germany’s benchmark hit a record as a growing number of investors panicked about whether the country could be the next victim of Europe’s debt crisis.

The interest rate on a 10-year Italian bond was 5.64% late Monday, more than twice the 2.67% rate for the German equivalent, considered the safest in the eurozone.

As European Union leaders met to head off a new debt crisis,  German Chancellor Angela Merkel expressed her confidence that the Italian government would push its €48 billion austerity package through Parliament.

“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.”

We do indeed.  With Italy’s national debt running at a massive 120% of GDP, investors are understandably worried.

As stocks were in freefall in the Piazza degli Affari in Milan on Monday, Berlusconi was nowhere to be seen — apparently preoccupied with the future of his own financial empire.

Shares in Berlusconi’s companies were sliding after a Milan court on Saturday ordered his company Fininvest to pay €560 million in damages for bribing a judge in 1991.

Although the appeals court shaved a couple of hundred million euros from the damages bill, it ruled Berlusconi should pay media rival Carlo De Benedetti who had fought Fininvest for control of Mondadori, Italy’s biggest publishing firm.

One of Italy’s richest men, Berlusconi on Saturday cut short a visit to the southern island of Lampedusa and fled to Villa Certosa, his luxury hideaway in Sardinia for urgent talks with his lawyer Niccolo Ghedini.

On Monday De Benedetti’s lawyers took the first step to access the damages fund that has been parked in a pool of banks led by Intesa San Paolo, while the billionaire prime minister was embroiled in talks with Fininvest chairman, his daughter Marina, who openly attacked the decision on Saturday, and other senior executives to try and find a way out of the mess.

Meanwhile shares in his broadcast empire Mediaset slid 3.82% and Mondadori shares also fell.

The 74-year-old Prime Minister with a reputation for light-hearted quips and countless gaffes was silent.

But one ally from his People of Freedom party, Roberto Formigoni, governor of the Lombardy region surrounding Milan, expressed his sympathy saying, “This has never happened before in Italian history.”

Education Minister Maria Stella Gelmini, another Berlusconi ally, also hinted at a new legal measure to protect the premier for paying the damages.

Last week Berlusconi withdrew a clause that had been inserted in the budget reform package that would have excused Fininvest from paying the compensation until it had exhausted the appeals process.

“The premier preferred to withdraw it after the subsequent attacks,” Gelmini told the daily Il Messaggero.

“However, it will be presented again in the Senate because you cannot leave such substantial damages to the discretion of the judiciary.

“The article is going to be better written and explained, but the principle will be protected.”

As Chancellor Merkel said, fighting debt remains a priority for the Berlusconi government.

CORRECTION: An original version of this story stated that Silvio Berlusconi called his Finance Minister Giulio Tremonti “a cretin”. In fact, he said he was “not a team player” and that “he [Tremonti] thinks everyone else is a cretin”.