Italy's political crisis is entering a new phase and fresh elections could determine both its EU membership and whether it remains within the single currency, according to analysts.
Voters in the euro zone's third-largest economy are likely to find themselves heading to the polls again, following the fall of populist Prime Minister designate Giuseppe Conte and the installation of International Monetary Fund (IMF) veteran Carlo Cottarelli as caretaker leader.
"Cottarelli will fail," Wolfango Piccoli, co-president of Teneo Intelligence, told CNBC's "The Rundown" Tuesday. "At this point, it's unclear whether any party will actually openly support his government in the confidence vote."
Conte gave up on an attempt to form a coalition government between the populist Five Star Movement (M5S) and Lega parties at the weekend, after pro-EU President Sergio Mattarella blocked his bid for Paolo Savona to serve as economy minister, saying that appointing a euroskeptic to the role would pose a threat to the Italian economy.
But Mattarella's push for a presidency-sponsored "neutral" government could be short lived, and Cottarelli — nicknamed "Mr. Scissors" for his pro-austerity stance — may prove to be just as destabilizing.
"He will remain in place as a caretaker prime minister, whose main job is to take the country to elections, most likely sometime in early autumn," Piccoli said.
Mattarella is now considering a request to dissolve parliament and call a snap election that could take place as early as September or October. The deadlock means Italy will be left with no effective government until the end of the year.
"If the desire of the president was to try and calm down markets by appointing a former IMF official, I think his plan might have failed," Piccoli added.
Italy on the brink?
Analysts say the next election campaign will feature significantly stronger anti-euro and euroskeptic tones, given the stand-off is likely to further embolden M5S, and especially, Lega.
"I think there is a significant risk that the whole election campaign will turn into some sort of referendum on fiscal discipline imposed by the euro zone governance rules, on the euro, and on Italy's wider role in the European family," Piccoli said.
Furthermore, Teneo believes that if M5S and Lega decide to run together, the risk of Italy exiting the EU will "go up" and support for the euro "will suffer in the foreseeable future."
"If they decide to run together, then there is a good chance that they will secure not just the majority, but an overwhelming majority in the new parliament, raising all sorts of question marks about the future of Italian politics and membership in the common currency," he said.
Meanwhile, M5S has called for Mattarella's impeachment, claiming that the president has abused his constitutional powers.
Financial market turmoil
Italy is the third largest economy in the euro zone, and any further upheaval in its politics could impact its fragile fiscal position, which would have a ripple effect in the EU.
The political disorder has already stoked a sell-off of Italian debt and a surge in safe-haven German bond prices, sending the yield spread between 10-year German and Italian bonds to its broadest since December 2013.
Ratings agency Moody's has also put the country's sovereign rating on watch for a downgrade.
Meanwhile, the euro languished at a six-and-a-half month low against the dollar Tuesday, after slipping to $1.1607, its lowest since November 9.
"We still think that eventually they will start to negotiate and start to find a solution," Adrian Zuercher, managing director and head of asset allocation at UBS, told CNBC's "Capital Connection."
"We are not overly concerned about the political developments in Italy. We don't think this will have a long-lasting effect on the market. In fact, on a 12-month basis, we think the euro can trade stronger versus the U.S. dollar."
