Italy's anti-establishment Five Star Movement (M5S) and its far-right partner, the League, appeared to be on the verge of signing a government deal on Thursday after overcoming outstanding divisive issues.
The plans would make a mockery of European Union rules on fiscal discipline.
The two anti-system parties have completed the joint policy programme for a coalition government and have passed the document to leaders for their approval. The gap between the yields on Italy's benchmark bonds and safer German bonds was at its widest since early January as Italian 10-year bond yields were set for their biggest two-day jump since March last year.
It is still unclear who could hold that position.
"It is totally nuts".
Di Maio and Salvini are expected to report back to the head of state, whose task it is to name a premier, early next week. The League has pledged to introduce a flat tax rate of 15 per cent, which would lower tax revenues by some 80 billion euros ($95 billion) per year, according to some estimates, while 5-Star has pledged new welfare payments for the poor costed at 17 billion euros.
"The new government will put radicalism at the heart of Europe".
"Everybody is anxious that Italy is becoming ungovernable, and that populists will drive the country into another deep crisis", a third euro zone official said.
The 39-page draft, obtained by Huffington Post Italia, reflected the difficulties the two pre-election rivals face in finding the resources needed to pay for promises they made to their voters during the campaign.
"They have already become more moderate and this will probably continue".
"If the market continues to trade off US yields and diverging economic data between the USA and European Union, it's hard to argue against the current direction in yields or the dollar", Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said in a note.More news: Are Analysts Bullish about Indivior PLC (LON:INDV) after last week?
In equity markets, MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1 percent, while Japan's Nikkei gained 0.7 percent.
Italy's borrowing costs have been rising as details of the accord emerge.
Yields on 10-year U.S. Treasuries have risen above 3.10 percent this week for the firs time since July 2011, continuing to weigh on stocks as investors considered whether U.S. government bonds might be more attractive than riskier equities.
At a business forum on the shore of Lake Como in September past year the leaders of Italy's soaring populist parties brushed off suggestions that they wanted to lead their country out of the euro.
On the face of it their plans, which they say may also include a form of parallel currency, could push the budget deficit far above targets agreed with the EU, setting up a clash with the European Commission and Italy's partners.
Central to deeper euro zone integration are plans to make the banking sector more resilient.
The sustainability of M5S-League reforms is in doubt, as Italy has one of the highest public debts in the world.
Polls have consistently shown that most Italians are against a departure from the single currency as well as the European Union, despite growing dissatisfaction.
Officials said that Italy's huge public debt was now effectively subsidized by the ECB's bond-buying program.
"They are on autopilot, a very clear way of managing their purchases and reinvestments but as we've seen the market can't do the work themselves in terms of repricing and telling politicians what they think their decision can be worth in terms of cost of debt". The ECB is barred from directly financing governments under the Maastricht Treaty. "Not likely, but still." the official said.