Several UK-based investment banks have been accused of mis-selling financial products to Italian cities and regions.
Nomura, UBS and Deutsche Bank are among those accused by
Italian prosecutors of mis-selling derivatives in deals worth 35bn euros
(£28bn).The banks deny wrongdoing, but refused to comment further because the matter is now before the Italian courts.
BBC Newsnight discovered that London's financial watchdog was made aware of the mis-selling, but failed to act.
Now those Swap derivatives look as if they could further damage the entire Italian economy - the third largest in the eurozone.
Sicily has already needed a 400m-euro bailout from the federal government in Rome, which itself may soon need aid from its eurozone partners to stay financially afloat.
On Monday, official figures revealed that the Italian economy, which has contracted for the past four quarters, shrank by 0.8% between April and June, slightly more than previously estimated.
Between 1997 and 2007, dozens of Italian cities and regions borrowed 111bn euros from London-based investment banks - the repayments of which were funded by a type of derivative called a Swap