"Italy failing to form a government, the markets were on edge and it happened to just crack and perhaps the reaction was a little bit out-sized", Aaron Clark, portfolio manager at Boston-based GW&K Investment Management, said by phone.
This drove a sell-off in stock markets across the world, as well as of Italian bonds.
A steep drop in USA bond yields, which drives interest rates lower on loans, weighed heavily on banks.
The new jitters about the stability of the euro sent the currency's value against the dollar to its lowest level in nearly a year.
The gap between Italian and German 10-year bond yields closed at the widest spread in four years, another indication of political risk to the Eurozone.
Spain's bond-yield spread with Germany also went to its widest this year at almost 1.35 percentage points ES10YT=RR and Madrid's IBEX bourse .IBEX closed down 2.5 percent.
USA stocks sold off, with the Dow Jones industrial average sliding 1.58 percent, or 391.64 points.
West Texas Intermediate crude gained 2.5 percent to $68.39 a barrel, the first advance in more than a week.
Shares in Italian banks Banco BPM, BPER, UBI and Intesa Sanpaolo were among the biggest risers on the STOXX, up between 3.3 percent to 8.5 percent after sustaining heavy losses in the previous month.
US markets were gearing up for a blizzard of data, including the Federal Reserve's favoured gauge of inflation - core personal consumption expenditures. The dollar, meanwhile, rose 0.1 per cent to 108.90 yen.
But US Treasury yields have tumbled as traders flock to assets considered safe - yields go down the more the bonds are in demand - while the yen, a go-to unit in times of turmoil, rallied.
The euro has also recovered somewhat on Wednesday, with the single currency - which lost around 0.85% on Tuesday - gaining by a similar amount against the dollar during the morning hours in Europe.
Gold increased 0.3 percent to $1,302.64 an ounce.
That country's parliament will hold a vote of no confidence in Prime Minister Mariano Rajoy after graft convictions of businesspeople and officials tied to his conservative Popular Party. Just before 7.30 a.m. ET, the 10-year is trading at 2.88%, a fall of around 8% from Tuesday. Sydney gave up 0.5 percent, Singapore dived 1.7 percent and Seoul was 1.6 percent lower.
USA crude oil fell 25 cents to $66.50 per barrel in electronic trading on the New York Mercantile Exchange.
Oil struggled under pressure from expectations that Saudi Arabia and Russian Federation would pump more oil to counter potential supply shortfalls from Venezuela and Iran, even as U.S. output has surged in recent years. The pound seems to have shrugged off the news and traded up 0.3% against the dollar.
In Asia, Japan's Nikkei 225 fell 0.6 percent while the South Korean Kospi lost 0.9 percent. The Hang Seng in Hong Kong slipped 1.4 per cent to 30,056.79 and the Shanghai Composite index fell 2.5 per cent to 3,041.44.