Asian financial markets closed sharply lower on Thursday, responding to fears that Italy’s worsening financial crisis could trigger a European recession.

Japan’s Nikkei average fell nearly 3 percent and Hong Kong’s Hang Seng dropped nearly 5 percent following news that Italy’s main borrowing rate had soared past 7 percent on Wednesday.

That surpasses the rate that forced Greece, Ireland and Portugal to ask for bailout loans.

Italy is the eurozone’s third largest economy and a bailout to prevent a default on its $2.6 trillion debt would be too expensive for the 17-nation common currency bloc to bear.

Meanwhile, International Monetary Fund chief Christine LaGarde on Thursday called on Italy and Greece to demonstrate greater “political clarity” in order to reassure global markets.

In Greece, contentious power-sharing talks are entering a fourth day after Greek leaders failed to announce on Wednesday who would lead the interim government.

The unity government will be tasked with securing a new European bailout loan and ensuring that Greece receives the next installment of its existing bailout, which it must receive within about a week if it is to avoid a catastrophic debt default.

On Wednesday, Italian President Giorgio Napolitano attempted to calm investors by naming former European Commissioner Mario Monti as the apparent successor to Prime Minister Silvio Berlusconi, who agreed earlier this week to step down from his post.

The Italian prime minister pledged to step down after lawmakers pass the tough austerity measures, which could happen by the end of the month. But investors are worried that he may try to back down from his promise.

Eurozone leaders have urged both countries to hasten with unpopular economic reforms aimed at saving them from bankruptcy, which would further destabilize the euro and fuel turmoil in the already unstable global financial markets.

The outgoing Greek leader George Papandreou pledged that his country would do “whatever is required to remain” in the eurozone, and said that the coalition government signals a new future Greece.

Mr. Papandreou and opposition leader Antonis Samaras had been locked in talks since Monday on who will lead a power-sharing government until early elections, tentatively scheduled for February 19, are held.

European finance ministers are waiting for the formation of a new government in Greece before deciding whether to grant the country another $11 billion loan installment.