Italy under fire in widening euro debt crisis

Financial market pressure on Italy intensified on Tuesday, sucking Europe's second biggest debtor nation deeper into the euro area danger zone and prompting emergency consultations in Rome and among European capitals.

Italian and Spanish bond yields hit their highest levels in 14 years, with five-year Italian yields reaching the same level as Spain's in a sign Rome is overtaking Madrid as a key focus of investors' concern about debt sustainability.

Italy's stock index fell 2.5 percent to its lowest in more than 27 months, dragged down by banks that have heavy exposure to Italian debt. European shares hit a 9-month low amid worries that slowing economic growth will make it even harder to overcome the euro zone's debt troubles.

"The fear of the market is that the world is going into recession again ... and in the euro zone the peripheral markets are the ones that will suffer most," said Alessandro Giansanti, strategist at ING in Amsterdam.

Economy Minister Giulio Tremonti chaired a meeting of the Financial Stability Committee -- made up of representatives of the government, the Bank of Italy, market regulator Consob and insurance authority ISVAP -- a day before Prime Minister Silvio Berlusconi is due to break his silence and address parliament.

In a statement after the meeting, the committee said Italy's financial system remained solid thanks to recent action to strengthen the capital base and liquidity reserves of Italian banks, but it would continue to monitor developments.

Spanish Prime Minister José Luis Rodríguez Zapatero postponed his departure for vacation to monitor economic developments after the risk premium on his country's debt over benchmark German bonds rose to a euro lifetime high of more than 4.0 percentage points.

Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, said he would meet Tremonti in Luxembourg on Wednesday, as it became increasingly clear that a second Greek bailout agreed on July 21 had brought no respite for the currency bloc. The European Commission said monetary affairs chief Olli Rehn, who is on vacation in Finland, would speak to Tremonti later on Wednesday.

Spain's economy ministry told reporters it was in contact with fellow European governments -- particularly Germany, Italy and France -- about the situation in the markets.

Zapatero last week called an early general election for Nov. 20. The conservative opposition Popular Party has a 14-point lead over his Socialists in opinion polls, but any narrowing towards an indecisive result could spook investors.

Elsewhere in Europe, leading policymakers are on summer holiday after agreeing last month on a second financial rescue for Greece, the worst hit euro zone debtor, that was meant to buy calm in the markets at least until September.