Thursday's deal on a 2.4 percent deficit for the next three years came after warnings from the European Commission – the EU's executive arm – to hold the reins on spending, AFP reported.
It vastly exceeds the 0.8 percent deficit foreseen by the previous, center-left government, and comes dangerously close to the EU rule saying that government deficits cannot exceed 3.0 percent of gross domestic product (GDP).
Crucially, it will inflate the country's already mammoth debt burden – currently 131 percent of GDP, the biggest in the Eurozone after Greece and way above the 60 percent EU ceiling.
The Milan stock exchange plunged Friday, dropping by around four percent at one point, as jittery investors dumped shares.
Trading in Banco BPM bank stocks was suspended after they tumbled nearly 11 percent. Trading was also briefly paused on the equities of BPER Banca, UBI Banca, UniCredit and Intesa Sanpaolo.
Meanwhile the yield on Italian government bonds shot up above the symbolic 3.0 percent threshold.
"It is a budget which appears to be beyond the limits of our shared rules," said Pierre Moscovici, who runs the European Commission's economic and finance portfolio.
"If you allow public debt to increase you create a situation that becomes unstable as soon as the economic context worsens," he added.
Italy does indeed face a lackluster growth forecast: just 1.0 percent in 2019 according to the Bank of Italy and the International Monetary Fund (IMF), and 1.1 percent according to the European Commission.
The budget decision follows weeks of suspense over whether Western Europe's first anti-establishment leadership would defy Brussels and uphold its costly electoral promises to increase public spending after years of austerity.
Italy's deputy prime minister Luigi Di Maio, who welcomed the budget deficit deal, said his government was not seeking a clash.
"The dialogue begins now with the EU and with major private investors, and we are not seeking a conflict," he told journalists.
"We want to pay back the debt and I can assure you the debt will go down," Di Maio said, adding that he expected the economy to grow as government spending rises.
Analysts said that by keeping the deficit below the EU's 3.0 percent limit, Italy may have eschewed triggering an all-out Eurozone crisis – for now.
"As long as Italy does not breach the 3.0 percent limit, the EU will likely admonish Italy without imposing a fine that could trigger an anti-European backlash in Italy," said Holger Schmieding, chief economist at Berenberg Bank.
"An Italian debt crisis remains an accident waiting to happen," he added.