NEW YORK (CNNMoney)
Over the weekend, Italian Prime Minister Mario Monti unexpectedly announced plans to step down after parliament passes a national budget later this month.
The news sent Italian stocks plunging and the yield on the Italian 10-year bond rising to 4.82% from 4.5% last week. Investors are worried that Monti's resignation could throw a wrench into Italy's plans to bring down its high levels of debt. Italy is the third largest economy in the euro area and political instability there could reignite the region's debt crisis.
"Monti has done a good job keeping Italy out of the cross hairs of Mr. Market, but the jig is up," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "Investors fear rearguard action that will dismantle the reforms of Monti's unelected technocrat government."
The reargaurd, in this case, refers to former Italian Prime Minister Silvio Berlusconi's People of Freedom party, which has agitated against Monti's reforms. In a long-shot bid, Berlusconi announced plans to run for the fourth time as the centre-right's prime ministerial candidate in a keenly awaited parliamentary election likely to take place in February.
While markets have rallied under Monti's tenure, analysts say investors have been underestimating Italy's deep economic problems and political dysfunction.
"Markets have grown too complacent about Italy, in our view," said Silvio Peruzzo, an analyst at Nomrua Securities, in a note. "Some repricing of the sovereign risk is likely."
European stocks were dragged lower Monday. But the downdraft in the United States was limited. The Dow Jones industrial average was flat at the opening bell. The S&P 500 was down 0.1% and the Nasdaq was down 0.2%.
Related: Fear & Greed Index stuck in neutral
Aside from Europe, U.S. investors will remain cautious as long as lawmakers fail to find consensus before the end of the year to avert the scheduled tax increases and spending cuts. Without a deal, the U.S. economy could fall back into a recession.
Related: Federal Reserve may buy more bonds
Investors are also waiting to see how the Federal Reserve acts later in the week.
The Fed's Federal Open Market Committee meeting on Tuesday and Wednesday could move markets. The central bank will have to decide the fate of one of its stimulus programs, Operation Twist, which is set to end this month.
Economists are expecting that the Fed will convert its program from swapping short-term bonds from long-term bonds into an outright bond purchase program.
In Asia, inflation quickened in China and revised data indicated Japan has slipped into recession. Asian markets ended higher. The Shanghai Composite was the best-performing major index, adding more than 1%.
On the corporate front, shares of Ingersoll-Rand (IR)rose after the company said it plans to spin off its commercial and residential security businesses into a new company. Ingersoll-Rand also announced a $2 billion share repurchase program and boosted its quarterly dividend.
Apple (AAPL, Fortune 500) shares were bouncing back, following last week's nearly 9% slide.
Best Buy (BBY, Fortune 500) shares declined after the stock was downgraded by Bank of America analysts.
Shares of McDonald's (MCD, Fortune 500) gained ground after the fast food chain said global same-store sales, a key metric, rose 2.4% in November, led by sales growth in the United States. 
First Published: December 10, 2012: 9:37 AM ET
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