Continued from page 1

“So grave is this threat that we have warned clients in recent weeks to hunker down, ride out this historic storm, move out of risky assets and focus on preserving capital,” Mr. Baumohl said.

The only thing that can keep Europe from the brink of disaster, he added, would be for the European Central Bank to start acting more like the U.S. Federal Reserve and accommodate the Continents profligate governments by buying their bonds. That would help to keep interest rates at low levels and buy time to resolve the crisis.

The ECB stepped in and bought some Italian bonds in recent days, helping to ease rates from unsustainable levels of more than 7 percent, where they landed early last week. But the central bank has indicated there are limits to how far it will go to help out indebted governments.

“We are not there to backstop the Italian government,” said Gabriel Glockler, a deputy director at the European Central Bank, said on a Washington visit Monday. He emphasized the central bank’s role primarily is to keep inflation at bay while also acting to discipline wayward governments by allowing their bond rates to rise when they fail to act responsibly.

He noted that Italian bond yields have eased some since Mr. Berlusconi left the government in the hands of a technocrat over the weekend.

With bond rates rising rapidly, digging out of a debt hole becomes exponentially harder for Italy and other stressed nations. Still, Mr. Glockler and other analysts are hopeful that a full-scale meltdown can be still avoided in Europe.

Mr. Glockler said the European Union is piecing together a comprehensive program to address debt emergencies step by step, albeit not in one dramatic measure, as hoped by financial markets. He added that Italy is fully capable of getting its economic act together and averting a panic.

Italy has been on the brink of fiscal problems for a decade,” and has always managed to pull through, he said.

Italy can still stumble out of the current crisis,” said Raj Badiani, European economist at IHS Global Insight. But to do so, the country will need considerably more help from the ECB after it adopts its economic-reform program, he argued.

Harm Bandholz, economist with Unicredit Markets, pointed out that regardless of what happens in Europe, another threat is looming for the U.S. economy — the return of gridlock and partisan warfare in Washington over the budget deficit in coming weeks.

The “unseemly” budget debate “disappeared from the spotlight in recent weeks,” he said, “but that is likely to change again soon.”