Italy is paying a high price for the political chaos of the past few days.
The heavily-indebted nation found buyers for nearly €6 billion ($7 billion) of its bonds on Wednesday, a sign that market fears that Italy could ditch the euro may be receding.
But investors demanded higher rates of interest for taking on the risk of holding Italian government debt given a political outlook that remains deeply uncertain. The government will pay 3% on 10-year bonds sold Wednesday, almost double the rate it agreed to pay in April.
Italy's main stock market index was 2% higher in afternoon trading, having lost 5% since Friday, with the successful auction helping to reassure investors.
Fears that new elections in the world's eighth largest economy could bolster radical parties and result in a clash between Rome and the European Union sent Italian stocks and bonds plunging on Tuesday and triggered a sell-off in global markets.
Short-term Italian bonds suffered their worst day since 1992 on Tuesday, according to Reuters.
Two populist parties failed to form a government on Sunday after Italy's president refused to accept their euroskeptic nominee for the post of finance minister.
A former International Monetary Fund official was instead asked to become interim prime minister at the head of a caretaker administration that would hold office until new elections could be held later this year.
But what happens next is still far from clear. A source at the presidential palace with direct knowledge of the talks said discussions were underway on a government that would include representatives from the populist parties.
Meanwhile, at least one of the parties feared by investors struck a conciliatory tone on the euro.
"If the markets fear that Italy will exit the euro, it's because someone spread the news," said Luigi Di Maio, the leader of the Five Star Movement. "But we never wanted that."
Related: Italy crisis rocks markets. Here's why investors are worried
Most analysts believe Italy will remain a member of the eurozone.
"A spot forecast assumes things are bad for the summer and into the autumn but that Italy doesn't ditch the euro or adopt policies that doom it to leaving before too long," said Societe Generale strategist Kit Juckes.
European Commission President Jean-Claude Juncker said Tuesday that he was "convinced that Italy will continue on its European path."
"Italy's fate does not lie in the hands of the financial markets," he said. "Regardless of which political party may be in power, Italy is a founding member of the European Union that has contributed immensely to European integration."
Italy's central bank governor Ignazio Visco echoed that message.
"The delicateness and exceptionality of these times is clear to everyone," he said on Tuesday. "We are part of a very large and deeply integrated economic area, whose development determines that of Italy and at the same time depends on it."
He also warned that Italy "must never forget the very serious risk of losing the irreplaceable asset of trust."
-- Delia Gallagher contributed reporting.
