Italy hurries austerity plans amid debt panic

Italy was preparing to rush through radical budget cuts on Thursday to prevent its economy, the third-biggest in the eurozone, from being dragged into the spreading European debt crisis.

Italian Prime Minister Silvio Berlusconi (C), flanked by his bodyguards, arrives at Grazioli palace in downtown Rome 12 July 2011. Reuters/Tony Gentile

The Italian Senate was set to approve a four-year crash austerity plan which is reported to have been raised to 45 billion euros in recent days.

Business daily Il Sole 24 Ore said that "the nightmare of one of Europe's founding states defaulting... has set off a strong and targeted reaction" from Italy's parliament, which is approving the austerity budget in record time.

The lower house was expected to give its final approval on Friday.

Palpitations were felt on the financial markets after Moody's ratings agency warned it was putting the United States on downgrade watch because of its debt troubles, and Fitch said it was downgrading Greece by three notches.

The IMF meanwhile said Greece would need another 104 billion euros in aid with almost a third of the money coming from private creditors - an issue that has caused a deep rift between European leaders.

Italian newspapers have reported tensions between Prime Minister Silvio Berlusconi and Economy Minister Giulio Tremonti over the austerity plan and the opposition has demanded elections after the budget cuts are approved.

European leaders are facing demands for rapid action to fight a spreading eurozone debt crisis, but diplomats say there are still too many divisions over a second rescue package for Greece.