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Throughout Europe’s debt crisis, Italy has largely managed to steer clear of the troubles that have engulfed its profligate Mediterranean neighbors.

The contagion that started in the euro zone’s smaller countries is suddenly moving to some of its largest, though.

As Greece teeters on the brink of a default, the game has changed. Investors are taking aim at any country suffering from a combination of high debt, slow growth, and political dysfunction — and Italy has it all, in spades.

In recent days, Italy has become Europe’s next weak link after Greece, Ireland, Portugal and Spain, harmed in particular by a power struggle between Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti. The dispute threatens to turn the euro zone’s third-largest economy, after Germany and France, into one of its biggest liabilities.

On Monday, the Italian government struggled to rein in the tensions as fears rose that political paralysis could make it harder for Italy to embrace the austerity demanded by outsiders to reduce one of the highest debt levels in the world. European policy makers also sought to figure out how they would put out a bigger fire if Italy were to succumb.

Those jitters hit stock markets Monday not just in Italy, where the major index fell nearly 4 percent, but across much of Europe as well, with the markets in France and Germany off more than 2 percent each. The United States was affected, too, with the Standard & Poor’s 500 index down about 1.8 percent on European debt fears and worries about the showdown in Washington over raising the United States’ debt limit.

“Italy is too big to fail,” said Moises Naim, a senior associate in the international economics program at the Carnegie Endowment in Washington. “If Italy really gets hit by contagion because of political mismanagement, it would be a threat not only to the euro zone but to the global economy.”

Political soap operas in Italy — especially those featuring Berlusconi — are nothing new, nor do they usually matter much to financial markets, even after the debt crisis hit Europe. The widespread problems in Italy’s economy, which has been sluggish for the better part of a decade, also rang few alarm bells.

What’s more, Italy’s banks are sound. They never speculated in a housing bubble. The current annual budget deficit is low, at about 4.6 percent of its gross domestic product. While Italy issues the largest amount of bonds of any euro zone country, Italians own about half the debt, making it less vulnerable to the follies of financial markets.

With interest rates rising, though, Italy’s economy is not growing fast enough to cover an accumulated debt load of 120 percent of gross domestic product, the second-highest in Europe after Greece. The International Monetary Fund expects growth to pick up only slightly, to 1.3 percent in 2012.

In a sign of how quickly things have turned against the country, the stock market regulator imposed emergency rules against speculation on Monday after shares in Italian banks slumped for a fifth consecutive session. The cost of insuring Italy’s sovereign debt against default surged to an all-time high, and the interest on its 10-year bond leaped to a record 5.67 percent.

While that is still well below what Greece pays, analysts say Italy will have serious problems if its borrowing costs rise above 6 percent.

‘’Italy is a banana republic that didn’t depend so much on foreign capital in the past, but now it does, and markets are less forgiving,” said Daniel Gros, the director of the Center for European Policy Studies. “Italy is in the danger zone; that is quite clear now.”

Italy tends to function best while in crisis-management mode, analysts say, and Berlusconi has begun to acknowledge the seriousness of the dangers facing the country after a phone conversation with the German chancellor, Angela Merkel, on Sunday.

Today, Berlusconi “understands the risks objectively because the situation is dramatic,” said Stefano Folli, the chief political columnist for the financial daily Il Sole 24 Ore.

Folli and other analysts predicted that the Italian Parliament would rally and pass a 40 billion euro ($56 billion) austerity package that Tremonti had championed — even if it turned out to be one of the last significant acts of a government running out of political capital.

Last week, Berlusconi sparked a sell-off in Italian bonds by suggesting Tremonti, a longtime political rival and the sole guardian of fiscal prudence in Italy, soon could be elbowed out of government, imperiling the austerity package, whose details still remain shrouded in confusion.

‘’He thinks he’s a genius and everyone else is stupid,” Berlusconi said of Tremonti in an interview published on Friday in La Repubblica, the center-left daily. “He is the only minister who is not a team player.”

For Italy, the biggest worry right now is that its fate may rest as much in Athens, Brussels and Berlin as it does in Rome.

At the end of the day, though, Gros said: “If Italy goes, it’s no longer a domino. It’s a brick.”

The New York Times