Nov. 7 (Bloomberg) -- The euro fell versus the dollar and yen as Italian Prime Minister Silvio Berlusconi faces a budget vote amid pressure to resign, stoking concern the region's third-largest economy will struggle to manage its debt load. The euro also weakened against the pound and Canadian dollar as concern mounted that political instability in Italy may push bond yields to levels that will force the region's second-most indebted nation to seek a rescue. Greek Prime Minister George Papandreou said he will step down to make way for a coalition government and secure outside financing to avoid a collapse of the nation's economy. The Swiss franc fell on speculation the central bank will adjust its currency cap. "The market will be reluctant to buy the euro for now given negative news out of the region," said Jane Foley, a senior currency strategist at Rabobank International in London. "The problem in Greece hasn't been resolved and now the market has Italy to worry about. Bond yields suggested the market is pretty nervous, and quite rightly so." The euro weakened 0.5 percent to 107.36 yen at 7:03 a.m. New York time. The shared European currency fell 0.3 percent to $1.3749, after depreciating to as low as $1.3681 earlier. The dollar lost 0.2 percent to 78.06 yen. The franc declined against all 16 major peers tracked by Bloomberg after Swiss National Bank President Philipp Hildebrand said the central bank expects the currency to weaken further, adding to bets the bank will adjust its cap of 1.20 francs per euro set on Sept. 6. Franc Declines The franc depreciated 1.1 percent to 1.2332 per euro, after touching 1.2394, the weakest level since Oct. 20. It declined 1.4 percent to 89.69 centimes versus the dollar and weakened 1.6 percent to 87.05 yen. The euro pared losses after Il Foglio reported Berlusconi may step down within hours and push for early elections. The prime minister later denied the report. Yields on Italy's 10-year bonds jumped to 6.68 percent, approaching the 7 percent level that drove Greece, Ireland and Portugal to seek bailouts. The rise in Italian yields pushed the spread with the German securities to 491 basis points, also a euro-era record. The euro weakened for a second day against the dollar and the yen after Berlusconi's majority in Italy's lower house unraveled with the defection of two allies to the opposition last week, and after a third quit yesterday. The prime minister said yesterday he was confident he still had a majority. Italy Focus "The market's focus is shifting to Italy," said Yunosuke Ikeda, a foreign-exchange analyst at Nomura Securities Co. in Tokyo. "Yields on Italian bonds may continue to rise unless Berlusconi resigns. The euro is likely to inch lower amid the flow of rather bad news out of Europe." Italy, which is due to auction treasury bills this week, is scheduled to sells more than 200 billion euros of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined. "If Italy had the same problems that Greece had, it would not be possible to have the euro anymore," said Luca Silipo, chief Asia-Pacific economist in Hong Kong at Natixis SA, who previously worked at Italy's central bank. "If you have a bankruptcy of Italy, then France will be next. You don't want Italy to have the same problem as Greece." Losses in the euro were limited after Papandreou met Antonis Samaras, the leader of the main opposition party, and "agreed to form a new government with the aim of leading the country to elections immediately after the implementation of European Council decisions on Oct. 26," according to an e- mailed statement from the office of President Karolos Papoulias in Athens. Greek Government Papandreou has already said he won't lead the new government, the statement said. "For now it removes the risk of some sort of disorderly Greek default," Wellington-based Bank of New Zealand currency strategist Mike Burrowes said of the reports on Greece's government. Wagers by hedge funds and other large speculators on a drop in the euro to 60,060 on Nov. 1, compared with net shorts of 76,512 a week earlier, according to figures from the Washington- based Commodity Futures Trading Commission. Swiss inflation unexpectedly slowed to a negative rate in October, data today showed. Consumer prices decreased 0.1 percent from a year earlier after rising 0.5 percent in September, the Federal Statistics Office in Neuchatel said today. Economists forecast prices to rise 0.2 percent. Deflationary Developments Unless the franc depreciates, "it could lead to deflationary developments and weigh heavily on the economy," Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday. "We are ready to take further measures in case economic prospects and a deflationary development should require it." "You can argue that the latest consumer prices data appeared to be deflationary," said Rabobank's Foley. "That suggests to me there is a potential for the SNB in the next couple of month to try and push up its euro/franc floor." The franc, sought in times of financial turmoil, has risen 8.6 percent versus the euro in the past 12 months, threatening Swiss exports and boosting the risk of deflation. --With assistance from Hiroko Komiya and Patrick Harrington in Tokyo and Andrea Wong in Taipei. Editors: Mark McCord, Matthew Brown To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net;

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