Italy is edging closer to an early election that could move the country further to the right, with markets sinking amid political uncertainty and concerns that the country's already touchy relations with the EU could suffer.

Milan's stock market plunged by 2.3% on Friday morning, hours after deputy premier Matteo Salvini, whose right-wing League party is the junior coalition member, announced he would no longer support premier Giuseppe Conte's 14-month-old populist government.

Borrowing costs on Italian debt - a measure of investor confidence - jumped higher.

Pushing his anti-migrant agenda, Mr Salvini is already unofficially campaigning to be the next premier. Although no new election date has been set, and the Italian president has not indicated if or when he will dissolve parliament, a return to the ballot box could come as early as late October.

A campaign and vote this autumn would play out just as the Italian government, with parliament's support, hammers out a new budget to meet European Union rules. There are already concerns the government might have to hike VAT to cover populist spending aimed at pleasing voter constituencies.

Mr Conte demanded late on Thursday that Mr Salvini, who is also interior minister, lay out his reasons in parliament for refusing to back the government he helped form after 2018 elections that brought populists to power for the first time in Italy.

It is up to Mr Salvini, in his roles as senator and League leader, "to explain to the country and justify to the voters who believed in the prospect of change the reasons that lead him to interrupt ahead of time, abruptly, the work of the government", Mr Conte said in a widely televised speech.

Mr Salvini wants to capitalise on soaring popularity in opinion polls, local and regional voting and the European Parliament elections earlier this year. Those have also shown a plunge in support for the oft-bickering 5-Star Movement, the League's coalition partner whose sometime left-leaning platform has kept the League from pulling the government farther to the right.

League senators on Friday pushed for a confidence vote in parliament on Mr Conte's government that the premier would be likely to lose, given Mr Salvini's refusal to keep the coalition going.

Legislators had just left Rome for the summer holiday, and it was unclear how soon the presidents of both chambers would call them back into session to hold debate and a vote.

Mr Salvini is impatient to formally pull the plug on the government.

Legislators "should move their rear-ends and come to parliament, if need be, even next week, because millions of Italians are also working the next week, and the week after", he told a sea of cheering supporters on Thursday night in Pescara, a small city on the Adriatic.

Although he has spent much of the past few weeks at the beach, Mr Salvini frequently depicts himself as the champion of the rank-and-file working class.

Far-right leader Giorgia Meloni, a likely ally in any League-led government, said in an interview with Corriere della Sera that elections could yield a government determined to make the "politically incorrect reforms that Italy needs", making the country crack down even harder on immigration and adopting "Trumpian" economic policies along the lines of the US administration.

An alliance with Ms Meloni's nationalist party could see Italy's already often-tense relations with Brussels deteriorate.