British investors should brace themselves for the worst case scenario this weekend, as the upcoming Italian referendum could trigger a fresh bout of volatility in an already unstable environment.

Italian voters will go the polls on Sunday (4 December) to vote on a set of proposed reforms to the constitution. Prime Minister Matteo Renzi wants to introduce reforms designed to reduce the size and powers of the Senate, which currently carries as much weight as the lower house, the Chamber of Deputies. He also aims to wrest back power from Italy's 20 regional governments.

However, the implications could reach much farther than Italy as the vote is seen as a test of popularity and strength for Renzi and his government, which has been in power for two years but is yet to face a general election.

Crucially, in the lead-up to the vote, the Italian PM said he would offer his resignation should the 'No' campaign prevail, but has since somewhat backtracked over the last couple of weeks. However, notwithstanding Renzi's claims that the referendum is a vote on the reform, rather than his popularity, analysts have warned that a win for the 'No' campaign could see him step down.

Carlo Alberto De Casa, chief analyst at ActivTrades and technical analyst for Italian newspaper La Stampa, told IBTimes UK the referendum has the potential to unleash a further wave of uncertainty, whose repercussion could be felt even in Britain.

"The markets have already been rocked by two historic and unanticipated votes this year," he said. "Two countries [Britain and the US] widely considered to have effective political systems characterised by stable, steady governance have produced votes that have truly astonished spectators across the world. Uncertainty alone can affect global markets and should there be a significant shake up in Italy, the UK should be braced for the tremors."

Jameel Ahmad, chief market analyst at FXTM, said discontent towards political classes perceived to be part of the establishment posed a real danger to equity markets.

"Political instability is a threat that investors can no longer afford to ignore in the developed world," he told IBTimes UK.

"There are elevated concerns that anti-establishment parties around Europe have probably taken encouragement from the recent victories from the anti-establishment in both the UK and the US."

The outcome of the Italian referendum pile pressure onto the country's already struggling banking and financial sector. Italy's banks have €360bn of problem loans against €225bn of equity on their books after successive governments failed to tackle the country's bloated financial system, exacerbated by fraudulent lending at several institutions.

The uncertainty surrounding the vote has wiped 20% of the value of Italian stocks this year, while Italian banks have lost half their value since the start of 2016 and analysts have warned a mass failure of Italian banks could trigger panic across the Eurozone banking system.

According to Ahmad, Britain would be unlikely to be exempt from the impact. "An uncertain outcome to the Italian referendum could add pressure to the banking and financial sector and this could also cross over into UK company shares," he said.

"The financial sector in Italy is still not in the best shape and while another referendum has helped shield attention onto a different direction, any additional uncertainty could weigh on the financial sectors."

Matteo Renzi campaigns for Yes vote
Italian Prime Minister Matteo Renzi said he would resign in the event of a 'No' win. Alessandro Bianchi/Reuters

City Index research director Kathleen Brooks made a similar point, highlighting the weakness of some other European lenders, notably Deutsche Bank, left them and their British peers at risk.

"A collapse in Italy's banking system could lead to intense pressure on global financial stocks in the aftermath of a No vote," she said.

Aside from financial implications, observers and economists have indicated a 'No' win could open the door to "Italy's Brexit moment". A defeat for Renzi could lead to a snap election, which could pave the way for the Eurosceptic Five Star Movement party to secure a majority in the lower house of the Italian government.

The party's founder, former TV comedian Beppe Grillo, has in the past called for a referendum on whether Italy should keep the euro, and to reconsider the country's role in the EU. The similarities with the Brexit vote are obvious and De Casa argued the impact could be even greater.

"It might feel like we've been here before with Brexit, but we have not," he said. "Britain had perhaps always been a reluctant European and an 'awkward partner' of the EU. Italy on the other hand has long been at the heart of the European Union, both geographically and politically."

However, he added that even in the event of Renzi walking away, the Five Star Movement would still be some way short of gaining power. "It is important to refrain from making a mountain out of a molehill," he explained.

"A 'No' vote does not guarantee another election, of which Five Star Movement would still be outsiders to win."