Italy is set to sidestep EU regulations to pump billions of euros into its faltering banking system - this would break the EU's rules on assisting struggling banks.

The values of bank stocks in Italy have plummeted by more than one-third since the UK decided to leave the EU. The sector has been considered vulnerable for some time and investors fear negative findings when the results of stress tests are published later in this month.

The country also faces a constitutional referendum on political reform in October, Matteo Renzi, the Italian prime minister, has said that he will step down if it is defeated.

His pledge has added to Italy's political instability, Citi Bank has described the vote as, "probably the single biggest risk on the European political landscape this year outside the UK."

Several Italian officials and bankers have told the media that the PM is determined to intervene to protect the country's banks despite warnings from Brussels and Berlin. New rules hope to shift the financial burden of assisting troubled banks on to creditors and away from taxpayers.

"We are willing to do whatever is necessary [to defend the banks], and do not rule out acting unilaterally, although that would only be as a last resort," one source told The Financial Times.

Last week, German Chancellor Angela Merkel signalled that she would not support requests to temporarily suspend state aid and bail-in rules to recapitalise Italian banks - arguing that is would end the European banking union. Mr Renzi responded by saying he will not be "lectured by the school teacher."

Last week the EU signed off on a €150bn fund to help Italian banks who are experiencing liquidity problems.