Greek Prime Minister George Papandreou. Sean Gallup/Getty Images

ABC News Kelly Cobiella reports:

Greek political leaders were deep in talks to form a new government today after Prime Minister George Papandreou agreed late Sunday to step down.  Papandreou shook world markets and angered fellow European leaders last week when he called for a popular vote on a very unpopular EU bailout package. And now with the immediate crisis averted in Greece, all eyes are now turning to Italy.

Italy’s cost to borrow money rose to a record high Monday, edging close to the level experts say is unsustainable.   Like Greece, Italy is struggling with high debt and a lack of growth.  But Italy’s economy is much bigger than that of Greece.  It is Europe’s third-largest economy behind Germany and France, and there are fears that a debt crisis in Italy would simply be too big to fix.

Italy’s government is under pressure to pass economic reforms, yet it appears unable to do much of anything while Prime Minister Silvio Berlusconi is at the helm.  There were rumors Monday morning that the controversial PM would step down within hours.

But on his Facebook page, embattled PM made it clear he wasn’t going anywhere, at least not willingly.  ”Rumors of my resignation are baseless,” Berlusconi said.  Parliament members may try to force him out with yet another confidence vote as early as Tuesday.

In Greece, the socialist government and opposition conservatives are now trying to agree on a coalition government to lead the country for the next 15 weeks, and perhaps more importantly, one that will approve the new European bailout package.  The deal must be formally ratified before Greece can receive its next installment of bailout money next month: $11 billion to pay bills and avoid default.

“In principal, there is now a consensus,” says Professor Kevin Featherstone of the London School of Economics.  ”What it means now is there is no possible (political) configuration that would not back a deal.”