Italy, the third biggest economy in the euro zone, has been plunged into political turmoil as Prime Minister Mario Monti has announced plans to step down. Meanwhile, his highly controversial predecessor, Silvio Berlusconi, says he will run for office again. Elections scheduled for March are now expected to be moved up to February.

The news unsettled financial markets. Since he was appointed Prime Minister one year ago to deal with the financial crisis, Mario Monti has imposed a great deal of austerity on the Italian people.

Unemployment has increased and living standards have fallen. But Monti’s medicine impressed many international investors. He has cut the budget deficit and brought down the government’s borrowing costs.

James Walston Professor of International Relations at the American University of Rome says Monti’s planned departure  is worrying. “It does mean that markets have become very much less stable than they were,” he argues, “because Monti was seen as a steadying hand. It is a very difficult moment and extremely uncertain.”

Monti’s decision was prompted by the man he replaced: Silvio Berlusconi. Berlusconi’s party, People of Freedom, has withdrawn its support from the Monti government and the former leader says he will seek a fourth term as prime minister.

Whether Berlusconi can achieve that goal is debatable. His support has slumped, and his many critics accuse him of trying to revive his political career in order to deflect attention away from his legal troubles — which include charges that he paid for sex with an underage prostitute.

His sudden return to the political fray has raised the specter of instability, rattling markets.