(Reuters) After another week of confusion and turmoil in Europe, investors are ditching whatever hopes they once had for a conclusive solution to the debt crisis.

That may foreshadow a gloomy holiday season in markets, especially if wary investors opt to reduce risk in their portfolios and take refuge in U.S. Treasuries and the dollar.

Just weeks after it seemed leaders had drafted a master plan to solve the crisis, doubts rose about whether Greece would back a 130 billion-euro bailout.

And as politicians in Athens struggled to form a consensus government, Italian bond yields spiked to a euro-era high of 6.4 percent, raising fears that the country may soon need to follow Greece and others in seeking an emergency bailout.

At the end of the day, it does seem like a grand plan is elusive at best, said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

We've seen one European bank and one U.S. brokerage fail. We know there are strains for French banks. We're wondering how long it will be before Greek default worries spread to Italy and Spain, he said. In a situation like that, money managers are going to decide to simply take their risk down.

Investors are betting the market will see evidence of that as soon as this week, as flight-to-safety flows help boost U.S. Treasury debt, lift the dollar against the euro and weigh on stock markets around the world.

The biggest fear is that a disorderly default in Greece or elsewhere would ripple across the global financial market the same way the Lehman Brothers collapse did in 2008. That, investors fear, would probably be enough to plunge the global economy into recession.

This is going to be pretty negative news for risk markets, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. We are going to see a continued flight-to-quality tomorrow.

Benchmark U.S. 10-year note yields dropped more than 29 basis points in the past week and a half as worries about Europe overshadowed signs of economic improvement in America.

FADING RISK RALLIES

Ashraf Laidi, CEO of Intermarket Strategy in London, said he expected the euro to struggle again this week after losing nearly 3 percent against the dollar last week. By year's end, he said it could fall below $1.30. It was around $1.38 Friday.

This past week really raised some tricky questions, he said. For the first time I can remember, the possibility that Greece really could leave the Eurozone was being talked about in cafes and bars as well as on trading desks.

If Greece can cobble together a new unity government that backs the EU rescue plan, that might, at least for a while, be a market-stabilizing factor, said Citigroup currency strategist Greg Anderson.

Prime Minister George Papandreou suggested Sunday he was ready to pass the baton.

But that is not likely to cheer investors much, meaning any rally in stocks or the euro will be shallow and brief.

These 24-hour risk-on rallies, I don't know how much longer people are going to be willing to do that, said Ader. Sell-offs are getting deeper because the rallies are only short-covering moves. People are not getting long and putting on bets that everything is suddenly OK.

FROM GREECE TO ITALY

Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York, said the focus is likely to shift from Greece to Italy fairly quickly in the weeks ahead, and that should mean more market volatility and unwillingness to take on risk.

Italy's debt-to-output ratio stands at 120 percent, second only to Greece in the 17-country Eurozone, and its borrowing costs are rising.

Prime Minister Silvio Berlusconi recently refused a loan offer by the International Monetary Fund, and his government may be on the verge of collapse.

Berlusconi says Italians are not feeling the crisis but that's because the European Central Bank has been providing high levels of liquidity at low interest rates and buying Italian bonds, Ruskin said. That begs the question, should the ECB stop that to show them this is really a crisis?

I have to believe a lot of investors like me are thinking this could be the start of Italy week, said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. Italy is going to rapidly rise on investor radar screens and may be the bigger story.

(Additional reporting by Richard Leong, Daniel Bases, Karen Brettell and Julie Haviv in New York; editing by Bernard Orr)