Italian President warns on "alarming" debt signals

By James Mackenzie

ROME (Reuters) - Italian President Giorgio Napolitano urged swift action to strengthen planned austerity measures on Monday, saying a severe market selloff was a clear warning that markets had lost confidence in Italy.

"No one can underestimate the alarming signal from today's surge in the differential between the prices of Italian public debt instruments and those of Germany," Napolitano said in a statement.

"It is a sign of the persistent difficulty in regaining trust as is urgently and indispensably required," he said, adding that he urged all parties not to block measures needed to restore credibility.

He said there was still time to insert measures "capable of reinforcing the efficiency and credibility" of the austerity package passed in parliament last month which is currently undergoing revision in the Senate.

Yields on Italian 10 year bonds climbed to nearly 5.6 percent on Monday, approaching the levels of more than 6 percent seen before the European Central Bank began buying Italian bonds last month in a bid to hold down its borrowing costs.

The premium investors demand to buy Italian bonds rather than benchmark German debt widened to 369 basis points, more than 30 points higher than the equivalent Spanish spread as Italy has moved firmly to the center of the euro zone crisis.

Debate on the austerity package is due to begin on the floor of the Senate on Tuesday afternoon with approval expected before the end of the week when the package moves to the lower house. Final approval is expected by September 20.

SYMBOLIC WEIGHT

His statement follows widespread criticism of Prime Minister Silvio Berlusconi's center right government over its handling of the austerity measures, which have been changed repeatedly over recent days.

The CGIL, Italy's largest union, has called a general strike on Tuesday to protest the austerity measures, which have also been condemned as "weak and ineffective" by the country's main employers federation, Confindustria.

A poll published by the left-leaning daily La Repubblica on Monday showed support for Berlusconi's government has crumbled, falling to 22 percent in September, from 27 percent in June and 29 percent in February this year.

Italy has found itself at the center of the euro zone debt crisis since early in July as markets have woken up to its combination of a public debt running at 120 percent of gross domestic product and one of the world's most sluggish economies.

Berlusconi holds a clear parliamentary majority but his coalition is riven with internal divisions and bitter personal rivalries and there has been persistent speculation it may fall apart before the end of its five year term in 2013.

(Editing by Myra MacDonald)