European shares fell on Wednesday as rising tensions around Italy's debt situation pushed its bond yields into the danger zone, hitting risk assets across the board and sending shares in financials sharply lower.

After rallying at the open on news Prime Minister Silvio Berlusconi was set to resign, an increase in margin call on Italian debt by LCH.Clearnet and Italy's top clearing house pushed 10-year paper to 7.5 percent and sent stocks tumbling.

The move past the 7 percent level, seen by many analysts as unsustainable in the long-run, prompted aggressive buying of Italian debt by the European Central Bank, which in turn took some of the edge off both equity and bond market runs.

Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management, said the ECB was the only game in town able to fight off the pressure on the peripheral debt market, although the large tail risk represented by the crisis meant they remained underweight equities.

By the close, the FTSEurofirst 300 <.FTEU3> was provisionally down 1.7 percent at 966.92 points, off its intraday high of 993.44, although benchmark Italian debt remained stubbornly high at 7.2 percent and the country's blue-chip bourse <.FTMIB> closed down 3.8 percent.

Banks were among the worst-hit sectors across the region, with the STOXX Europe 600 Banks index <.SX7P> down 3.7 percent, weighed by a near 7 percent fall for leading Italian lender UniCredit .

Heavyweight HSBC took the most points off the FTSEurofirst 300 index after it posted forecast-lagging results. HSBC shares fell 5.8 percent.

(Reporting by Simon Jessop and Francesco Canepa)