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European stocks dropped, extending last week’s selloff, as Italian Prime Minister Silvio Berlusconi struggled to hold power before a budget vote and Greece worked on plans to form a new government.

In Italy, Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow on the 2010 budget report as contagion from Europe’s sovereign debt crisis pushed the country’s borrowing costs to euro-era records. The yield on Italy’s 10-year bonds surged to as much as 6.68 percent today. Stocks pared losses as Berlusconi’s former spokesman Giuliano Ferrara said the Italian premier is likely to decide on his political future “within hours,” with his formal resignation coming next week after he secures parliamentary approval of austerity and economic-growth measures. Reports of his resignation were “totally unfounded,” Berlusconi said in an interview with newspaper Libero.

The Stoxx 600 dropped 3.7 percent last week after a failed attempt by Greek Prime Minister George Papandreou to hold a referendum on the latest bailout package spurred concern Greece may default. Papandreou yesterday agreed to step down to allow the creation of a new national unity government intended to secure international financing and avert a collapse of the country’s economy.

National benchmark indexes fell in 10 of the 18 western European markets today. The U.K.’s FTSE 100 slipped 0.3 percent while France’s CAC 40 and Germany’s DAX Index lost 0.6 percent.

European retail sales fell more than forecast in September as the debt crisis prompted households to cut spending. Sales in the 17-nation euro region decreased 0.7 percent from August, the European Union’s statistics office said today. Carrefour SA fell 2.6 percent as euro-region retail sales fell and Citigroup Inc. downgraded the shares. Metro AG, Germany’s largest retailer, lost 2.1 percent, while Hennes & Mauritz AB slid 1.1 percent to 209.30 kronor in Stockholm.

PostNL NV slid 7.4 percent as the biggest Dutch postal operator said third-quarter operating profit fell 22 percent as domestic mail deliveries declined.

National Bank of Greece SA and Piraeus Bank SA advanced more than 4 percent in Athens.