"Rising bond yields curtail the value of banks' sovereign holdings," Marco Vailati, head of research and investments at Cassa Lombarda in Milan, said.

Italian banks, which hold around 300 billion euro (263.2 billion pounds) of domestic government bonds, have come under pressure as the risk of higher budget deficits lifts premiums on government bonds.

The anti-establishment 5-Star Movement and the far-right League sought backing on Monday from Italy's president for their choice of prime minister who would lead a coalition seeking billions of euros in tax cuts, additional welfare spending and a roll-back of pension reforms.

The yield spread Italy pays over Germany on a 10-year maturity rose by 26 basis points from Friday to a near one-year high of 190 basis points.

Also weighing on Italian banks are the new coalition' tax plans, Vailati said. Lenders have booked large losses due to soured loans in recent years following a deep recession, accumulating tax credits towards the state.

"Plans to simplify the tax system ... could reduce the value of lenders' tax credits," he said.

Shares in mid-tier Credito Valtellinese, which is known as Creval and has one of the largest exposure among listed banks to Italian bonds relative to both its total assets and capital, sank further after a 5.8 percent drop on Friday.

Earlier this year, Creval raised eight times its market value in cash from investors to strengthen its balance sheet but it still in the process of shedding bad debts.

A plan to make it harder for banks to recover debt from retail borrowers, included in a programme agreed last week by the League and the 5MS, has also hit shares.

Italy's biggest loan collector DoBank fell 4.5 percent, taking its losses over the past week to 20 percent.

(Reporting by Valentina Za and Danilo Masoni; Editing by Alexander Smith)