Prime Minister Silvio Berlusconi tried on Tuesday to calm fears that Italy could be swept into a full-scale financial crisis and the opposition pledged to smooth the passage through parliament of tough debt-cutting measures.
"For us, for Italy, this is certainly not an easy moment," Berlusconi said in a statement which followed a chaotic morning on financial markets in which Italian 10-year bond yields climbed past 6 percent, their highest level in a decade.
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Earlier, Economy Minister Giulio Tremonti left a meeting of euro zone finance ministers early to return to Rome to wrap up approval of a 40 billion euro ($56 billion) package of austerity measures expected to be passed in parliament in the coming days.
"The actions under discussion in parliament will accelerate the reduction of the debt. Already this year, we will bring the primary balance into significant surplus," Berlusconi's statement said.
"The crisis is pushing us to accelerate the process of correction extremely rapidly, to strengthen its content, to fully define further steps to bring the budget into balance by 2014."
With Italy sitting on 1.6 trillion euros of outstanding government bonds, any increase in borrowing costs could severely disrupt efforts to cut a debt mountain equivalent to 120 percent of gross domestic product.
Earlier, the premium investors demand to hold Italian debt rather than benchmark German bonds widened to a record 350 basis points. Bank shares also dropped heavily before markets picked up after news Tremonti was returning to Rome.
"Any delivery from the government on the austerity package, any good news in that respect, is very, very positive. So if politicians are getting their act together, it's absolutely good news," said Royal Bank of Scotland analyst Paola Biraschi.
Italy, the euro zone's third largest economy, has largely avoided the turmoil hitting Greece, Portugal and Ireland. But it has been targeted over worries about the sustainability of its debt burden.
Tremonti has overseen a four-year, 40 billion-euro austerity package designed to bring the budget into balance by 2014, including measures to cut funding to local government and health services, and delay retirement.
He has faced reluctance and even outright resistance from some in the government worried about the electoral impact of unrelenting austerity but this week's crisis appears to have overcome such resistance.
In a gravely worded statement, Berlusconi, who normally exudes optimism and who has hitherto boasted of his government's success in keeping out of the crisis, said Italy had overcome even more difficult moments in its past.
"We must be united, cohesive in our common interest, conscious that the efforts and sacrifices of a brief period will correspond to permanent and secure gains," he said.
The austerity measures still require approval in parliament but both government and opposition have indicated they want the package passed quickly to reassure markets.
Senate President Renato Schifani said he would urge the heads of the different party groups to pass the measures in the upper house on Thursday.
Italy's main opposition group, the center-left Democratic Party, called for the package to be approved by the end of the week, while the ruling center-right PDL party was expected to back whatever Tremonti suggested.
"There may be possible, limited modifications but we will leave the field free for Tremonti," Anna Cinzia Bonfrisco, a senior PDL parliamentarian, told reporters.
As the morning panic on the markets eased, the 10-year Italian/Bund spread dropped back to 319 points and an auction of short-term bills (BOTs) passed off without any serious problems.
The positive market reaction to news Tremonti was returning from Brussels underlined the marginal position Berlusconi has taken in the crisis.
Reeling from the 560 million euro ($801 million) penalty his Fininvest holding company was ordered to pay rival Carlo De Benedetti at the weekend, Berlusconi had not spoken in public since last week.
Markets plunged on Friday after a newspaper interview in which Berlusconi criticised the sometimes abrasive Tremonti for not being a "team player," a remark which underlined persistent tensions in the government.