PORTUGAL'S government is tottering close to collapse after two ministers quit over its bailout reforms, sparking cries of concern from European authorities as financial markets take fright.
Stock markets and the euro fell and bond yields rose as the crisis fed fears of a new wave of instability from the eurozone's debt-laden periphery.
Alarm spread after Foreign Minister Paulo Portas resigned on Tuesday evening, a day after the shock departure of Finance Minister Vitor Gaspar.
Portuguese newspapers reported on Wednesday that the agriculture and social security ministers were also likely to quit.
The crisis came at delicate time as Prime Minister Pedro Passo Coelho tries to fulfil the terms of the 2011 bailout that rescued Portugal from financial collapse.
Passos Coelho kept up appearances on Wednesday, heading to Berlin as scheduled for a top-level meeting on youth unemployment.
But European leaders urged the premier to settle the uncertainty as observers speculated that President Anibal Cavaco Silva would call a snap election.
"The political situation should be clarified as soon as possible," said the European Commission's Portuguese president, Jose Manuel Barroso, on Wednesday.
Lisbon's key PSI 20 index of leading shares plunged 5.45 per cent in afternoon trade, with leading exchanges elsewhere in Europe sliding too.
Portuguese borrowing prices skyrocketed with the yield on benchmark 10-year Portuguese government bonds spiking above eight per cent for the first time since November 2012, before easing a little.
"The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardised by the current political instability," said Barroso.
"If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery," he added.
In a bid to hold together his conservative coalition, Passos Coelho on Tuesday refused to accept Portas's resignation.
But analysts warned that the political disarray could bring down his government and derail the country's recovery under the 78 billion euros ($A111.56 billion) international bailout it received in 2011.
Passos Coelho's government has just two weeks to come up with a programme to reform the state before auditors for the IMF, European Union and European Central Bank arrive on July 15.
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