[LONDON] As financial markets tried to digest Europe's unprecedented decision to impose bailout losses on Cypriot bank depositors, a second front of fear has broken out in the European debt crisis: the failing health of Italian banks.

Attracting the most concern were the bonds of the four largest banks in Italy, with jittery investors unloading their positions. The fear is that they might become the latest investor class to suffer losses as a result of a new get-tough attitude in Brussels when it comes to bailing out banks.

Indeed, while it is too early to tell if Italian, Spanish and Greek savers will pull out their deposits in response to the Cyprus tax, investors holding the bonds of banks in Spain and especially Italy are already taking action.

In Italy, which is ravaged by a stagnating economy that is forcing hundreds of small companies to go out of business each day, the country's banks are experiencing a steep increase in problem loans - among the most in the eurozone - that is worrying regulators and has made betting against Italian bank bonds the latest investment fad.