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.

On Wednesday, Italian President Giorgio Napolitano attempted to reassure financial markets 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.

Meanwhile, Greek Prime Minister George Papandreou gave an impassioned farewell in parliament Wednesday, but Greek leaders failed to announce who would lead the interim power-sharing government.

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 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.

The outgoing Greek leader 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.

Greek news accounts said that 60-year-old Parliament chief Filippos Petsalnikos has been tapped as the interim prime minister after early speculation had centered on Lucas Papademos, an economist and former vice president of the European Central Bank. But no selection was announced and Greek leaders said they would meet again Thursday to try to make a choice.

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. Without it the country's finances are expected to collapse within another week or so.