Stocks in Europe were dragged down again today as concern that Italian prime minister Silvio Berlusconi will struggle to keep a majority overshadowed efforts by Greece to form a national unity government to secure aid.

European shares briefly turned positive today, led by Italian stocks on talk, subsequently denied, that the country's prime minister would resign, and after a pullback in the country's debt yields from euro-era highs.

The FTSEurofirst 300 index of top European shares fell 0.6 per cent to a provisional close of 974.03 points, having been down almost 2 per cent in early trade.

But Italy's benchmark outperformed, up 1.3 per cent, clawing back some of Friday's heavy losses. Heavyweight Intesa SanPaolo rose 2.8 per cent, ahead of results on Tuesday, and after falling 4.8 per cent on Friday.

"Berlusconi has a terrible track record on reform. Markets are hoping whoever (would replace) him can only be better. Forecasting economics and markets is hard enough but forecasting political newsflow is nigh on impossible," Daniel McCormack, equity strategist at Macquarie, said

With Italy’s borrowing costs now at a record high of more than 6.5 per cent, European markets are fearful that Italy will be forced to follow Greece, Ireland and Portugal in seeking a bailout.

The benchmark Stoxx Europe 600 has slid 3.7 per cent last week after a failed attempt by Greek prime minister George Papandreou to hold a referendum on the latest bailout package roiled financial markets and spurred concern Greece may default.

Mr Papandreou has agreed to step down to allow the creation of a new government intended to secure international financing and avert a collapse of the country's economy.

He met Antonis Samaras, leader of the main opposition party, and agreed to form a government to lead the country to elections immediately after the implementation of the European bailout package that was completed on October 26th.

Japan's Nikkei 225 Stock Average lost 0.4 per cent. Hong Kong's Hang Seng Index slipped 0.8 per cent, while China's Shanghai Composite Index dropped 0.7 per cent.

The MSCI Asia Pacific Index retreated 0.5 per cent and futures on the Standard and Poor's 500 Index declined 1.4 per cent.