Just when traders thought they were in the clear, news of Italy’s pending demise crushed equity markets and sent shivers down the backs of sovereign debt bondholders.

U.S. equity markets sold off hard on Wednesday amid fear that the debt crisis in the European Union can’t be contained. The Dow Jones Industrial Average dropped 387 points to close at 11,783 while the S&P 500 took a 46 point hit, falling to 1229.

With the fate of Europe resting in the palm of uncertainty, currency traders quickly sold off the euro after news broke that Italian Prime Minister Silvio Berlusconi would resign. The EUR/USD currency pair fell to 1.355 mid-day Wednesday and Treasuries strengthened slightly.

And as expected, the return of fear led the Chicago Board Options Exchange Volatility Index (VIX) higher as it soared past the key 30 point level to stabilize near 36.4 for the day.

The catalyst for the selloff occurred overnight when the interest rate on Italian bonds soared above 7 percent, which is the level at which Greece, Portugal and Ireland began to ask for a bailout. That caused a massive pre-market selloff in the futures.

The question that remains is how the EFSF will end up bailing out countries without the assistance of the IMF and ECB. Only time will tell.