The Milan stock market rose Monday after President Sergio Mattarella vetoed the nomination of fierce eurosceptic Paolo Savona as economy minister.
The move enraged the anti-establishment Five Star Movement and far-right League, and prompted their prime minister-elect to step aside.
The president now looks set to appoint Carlo Cottarelli, a pro-austerity economist formerly with the International Monetary Fund, to lead a technocrat government, ahead of possible new elections in the autumn.
"Mattarella has made it clear that he will not allow any policy that could put Italy on a slippery slope towards a major confrontation with the EU that could potentially jeopardise Italy's euro membership," said Holger Schmieding, an analyst with Berenberg.
Around 0745 GMT, the FTSE Mib index stood 0.7 percent higher at 22,545 points, having risen almost two percent at the opening.
Banking stocks led the way, with Unicredit, Ubi Banca, Banco BPM and Intesa Sanpaolo all higher.
The Italian government bond market also rose -- reflecting increased investor confidence -- as did the euro which stood around 0.4 percent higher against the dollar amid relief that a eurozone crisis had been averted for now.
"Mr Mattarella's refusal on Sunday to approve a proposed eurosceptic economic minister gave the euro a much-needed push," said Hussein Sayed, chief market strategist at FXTM.
"However, it is far from certain that Mattarella's current move will end Italy's drama."
© 2018 AFP