Italy austerity nears approval as pressure mounts

Italy's lower house of parliament is expected to approve the centre-right government's much revised austerity plan on Wednesday as Rome struggles to stem a financial market crisis now threatening the whole euro zone.

The 54 billion euro ($73.80 billion) mix of tax hikes and spending cuts aimed at balancing the budget by 2013 was agreed under heavy pressure from the European Central Bank which has demanded tough action from Rome to cut its massive public debt.

To speed approval, Prime Minister Silvio Berlusconi's government has tabled a confidence motion which would force it to resign if it lost. An initial vote is scheduled for around 1200 GMT ahead of final approval at around 1800 GMT.

Whether that is enough to draw a line under a crisis which has driven Italy's borrowing costs to potentially unmanageable levels and brought it to the brink of financial meltdown remains to be seen.

Markets made nervous by the continuing problems in Greece have turned on Italy with a vengeance over the past two months, hammering bonds and banking stocks amid doubts about its economy and the sustainability of a 1.9 trillion euro debt mountain.

An auction of long term bonds on Tuesday saw 6.49 billion euros of securities sold but forced the Italian Treasury to offer record interest on 5 year paper.

Only the ECB intervention has held back market pressure but the steady rise in yields over the past week, almost to where they were when the central bank began its bond buying, shows how much sentiment has turned against Italy.

Yields on Italy's 10 year bonds stood at 5.7 percent on Tuesday, not far off levels of just over 6 percent seen before the ECB intervention while the spread over benchmark German debt climbed as high as 404 basis points before easing back to 387 points in the afternoon.