The FTSE Mib index in Milan later recovered slightly and was down 2.57 percent at 20,118 points at 09.25 GMT.
Analysts said the fall was also linked to concern after an increase in borrowing costs for Italy on the bond market – a sign of investor unease.
The worst performer was Mediolanum bank which fell 5.12 percent to €5.56 a share and Monte dei Paschi di Siena – down 4.09 percent at €20.88. Energy major ENI, a heavyweight on the stock market, also suffered due to the unrest in Libya where it has major assets. Its shares were down 2.95 percent at €18.07.
The fall comes days after national statistic agency Istat announced the Italian economy had shrunk in the first quarter of this year, a worrying sign for Prime Minister Matteo Renzi and his reform-driven agenda.