The iShares MSCI Italy (NYSEArca: EWI) was down more than 2% in U.S. morning trade after Prime Minister Mario Monti said he plans to step down early.

Italy’s stock market sold off on Monti’s resignation and news that former prime minister Silvio Berlusconi has decided to seek office again. Berlusconi’s party withdrew its support for Monti’s government.

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

“You can expect a sharpening in anti-austerity, anti-reform rhetoric…and this will probably translate into a higher risk premium on Italian assets,” said Goldman Sachs analysts in a Reuters article.

The Italy ETF fell sharply in the first half of 2012 on the European debt crisis but has stabilized since July. The fund is up about 7% year to date.

Yields on Italian government bonds rose on Monday, MarketWatch reports. PowerShares DB 3X Italian Treasury Bond Futures ETN (NYSEArca: ITLT) and PowerShares DB Italian Treasury Bond Futures ETN (NYSEArca: ITLY) are exchange traded notes designed to track Italian government debt. [ETF Chart of the Day: Italian Government Bonds]

iShares MSCI Italy

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