The euro and global stocks fell on Monday as political uncertainty in Italy fuelled concern the euro zone debt crisis could engulf its third biggest economy, prompting investors to cut exposure to riskier assets.

Investor focus shifted to Italy, where Prime Minister Berlusconi is facing rebellion from his party, overshadowing a government coalition deal in Greece to help secure its latest bailout package and avoid a near-term default.

The FTSEurofirst fell 1.4 percent, adding to a 3.8 percent decline last week which ended a five-week rally as Greece slid into political turmoil and Italy came under pressure to restore its credibility in financial markets.

The MSCI world equity index shed 0.6 percent as emerging stocks slipped 0.5 percent.

The focus is Italy; Italy's clearly the big one. Everyone expected what has come out of Greece, Christopher Potts, strategist at Cheuvreux, said.

The whole problem is the (Italian) opposition and its disarray. Who takes over and how will it be organised? No-one has the answer but it's of huge importance, he added.

CRUNCH TIME FOR BERLUSCONI

An Italian parliamentary vote on budget reforms on Tuesday is turning into a crunch test for Berlusconi's leadership as he struggles to rein in party rebels threatening to bring down his government.

With Italy's debt levels stuck at 120 percent of GDP, the country's debt problems would pose a much bigger risk to the financial markets than Greece does.

Italy's borrowing costs have been rising sharply over the past several weeks, with the Italian 10-year government bond yield rising more than 100 basis points since late September.

Italian 10-year government bond yields hit 14-year highs of around 6.59 percent on Monday, hoisting their yield premium over benchmark German Bunds to their highest since 1995. The cost of insuring the country's debt against default also rose.

The ructions in Italy spurred flight to quality, hoisting U.S. and German government bond prices. Bund futures were last up 70 ticks on the day at 138.30 while U.S. T-note futures were up 10/32 at 130-18/32.

Fears that Italy was getting sucked into the debt crisis pushed the euro lower against the dollar. It was last 0.7 percent lower against the dollar at $1.3703, having risen as high as $1.3839 in the Asian session.

The euro is under pressure as Italian spreads are up and that is a real risk factor, said Jeremy Stretch head of currency strategy at CIBC World Markets. Italy is too big to be safe and markets are fearful that political uncertainty will claim its second victim in Italy.

Political wrangling in Greece had sparked panic in global financial markets on fears that it would fail to save the country from defaulting and to stop the region's two-year debt problems from spreading to other countries in the euro zone.

While it has managed to cobble together a new government to help get its aid package, market jitters remain over a lack of funding to beef up the euro zone's bailout fund after EU leaders failed to get any concrete pledge for new money at a G20 summit on Friday.

Gold prices gained about 1 percent as the European debt worries triggered safe-haven interest in bullion. Spot gold rose 1.1 percent to $1,772.76 before retreating to $1,763.70.

Brent crude eased off earlier highs, and was last flat at $111.93 a barrel, having risen rose above $113 earlier as hopes of oil demand growth overshadowed concerns about the euro zone debt crisis.

(Additional reporting by Simon Jessop and Anirban Nag; Editing by Toby Chopra)