Italian stocks have fallen sharply, reacting to news that Prime Minister Mario Monti plans to resign and former premier Silvio Berlusconi is to run for office again, BBC News reported.

The main Italian stock index fell 3.3%.

Other indexes throughout Europe were also lower, with banks the worst hit among shares.

Monti became the leader of a technocrat government in 2011 after investors became worried about Italy's economic health. He replaced Berlusconi after the Italian 10-year bond yield reached a record of 7.48% in November 2011, bringing about Berlusconi's departure.

Since then, Italy's yields have dropped and the focus has shifted to Spain, which has taken a bailout for its banks, and back to Greece.

However, on Monday, Italy's 10-year bond yield jumped more 0.2 percentage points to 4.79%. Among individual shares in Italy, banks were the hardest hit. Italy's biggest, Unicredit, fell 4.9%. Banca Monte dei Paschi di Siena fell 6% and Banca Popolare di Milano declined 6%.

Across banks in Europe, Germany's Commerzbank fell 2.2% and France's BNP Paribas dropped 1.4%. In Spain, banks such as Santander, Bankia and BBVA all turned lower.

"Monti is the one who managed to stabilize Italy and stop the contagion from Greece," said David Thebault, a trader at Global Equities. "His surprise resignation brings back the political risk in the equation, something we had forgotten about."