Shares in Italian banks bore the brunt of selling pressure, sinking 7.3 percent as government bonds sold off and the focus turned to rating agencies.

Italy’s decision to raise public spending despite a huge debt pile prompts major sell-off of shares and government bonds.

Investors have struck a gloomy note on the final trading day of the third quarter.

Markets are sharply lower across Europe, as investors do not share the Italian government’s enthusiasm for a higher deficit target.

The Italians have raised tensions with Brussels, which has argued for debt reduction in Italy, and prompted fears of a fresh debt crisis.

Italy’s banking index was down 6 % and set for its biggest one-day loss since June 2016, with shares in the country’s two largest banks, Intesa Sanpaolo and UniCredit, also falling by 6%.

The euro has also been hit, and is currently down 0.5% against the dollar at $1.1582. It is roughly flat against the pound at 88.98p.

European shares slid on Friday after the Italian government agreed to set a higher than expected budget deficit target that could put Rome on a collision course with Brussels.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany

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