Prime Minister Silvio Berlusconi tried on Tuesday to calm fears that Italy could be swept into a full-scale financial crisis as the opposition pledged to smooth the passage through parliament of tough debt-cutting measures.

But concerns about Italian debt, the prospect of fresh bank stress test results on Friday, and the reality of another EU summit focusing on the bloc's debt difficulties impacted on Western stock markets and the European single currency alike.

"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," Berlusconi said in a statement.

His statement came as the euro tumbled to 1.39 against the US dollar, its lowest exchange rate in the past four months.

Markets in London, Frankfurt, Paris, Madrid, and Tokyo all fell dramatically, although the Italian markets launched a surprising rally after nose-diving in early trading to end up almost breaking even.

The Italian recovery surprised many, considering that the European Union finance ministers' summit in Brussels was primarily focusing on the possibility of Italy becoming the latest eurozone country to need some form of financial assistance. To underscore the seriousness of the concerns, the Italian government's summit representative made his apologies and bowed out early.

German business papers are worried about Italy

"I am returning to Rome to complete my austerity plan," Italian Finance Minister Guilio Tremonti told journalists in Brussels on Tuesday. Silvio Berlusconi's government is seeking to generate some 40 billion euros through a combination of spending cuts and tax increases. Italy's center-left opposition has pledged to back the austerity cuts, in stark contrast to the political and public tension in Greece as the government in Athens tries to tighten its belt.

Preoccupied prime minister?

Nevertheless the rate of interest paid on 10-year Italian bonds rose to over 6 percent, their highest level in a decade.

Concerns about Italy's national debt that is currently 120 percent of Gross Domestic Product have been fueled further by the prospect of Prime Minister Silvio Berlusconi being distracted by the legal difficulties he is facing.

A Milan court ruled on Saturday that Berlusconi's Fininvest media company should pay 560 million euros in damages to a rival firm after bribing a judge to approve a company takeover. The judge in question was found guilty and sentenced to 33 months in prison in 2009.

"That is really Berlusconi's main preoccupation," Deutsche Welle correspondent Megan Williams in Rome said. "Within this austerity package, he tried to sneak in a clause that says he wouldn't have to pay that sum of money until it goes to another appeal decision. The parliament said 'no, we won't accept that,' and his government didn't back it, but that's what Berlusconi has been centrally preoccupied with, not the Italian disaster that's looming."

It is Berlusconi's rival Carlo de Benedetti, honorary president of the CIR media group and the main left-leaning media mogul in Italy, to whom Berlusconi would have to pay compensation.

"[Berlusconi's] a loose cannon," Megan Williams said. "Right now he's furious about this court decision, he has released one small statement, but it was interesting to see that it was a written statment; he didn't go on national television as he often does when he's on the warpath."

The Italian prime minister is currently facing two other criminal proceedings, one of which for having allegedly paid for sex with a Moroccan-born exotic dancer when she was under 18, the legal age for prostitution in Italy. He's also accused of pressuring police to release the dancer, Karima El Mahroug, after she was arrested for theft. Berlusconi denies all charges against him, and Mahroug also says she never slept with the prime minister.

'Very serious situation'

At their summit in Brussels on Monday, Eurozone finance ministers had already indicated a willingness to expand the size and scope of the European Financial Stability Facility (EFSF), as well as proposing complimentary measures like lowering interest rates or extending the maturity on loans for particularly hard-hit countries like Greece.

Despite the official signatures in Brussels, some details remain vague

Jutta Urpilainen, the finance minister of Finland - one of the more fiscally healthy countries getting increasingly frustrated by the problems elsewhere in the bloc - described the situation as "very serious at the moment."

Over the past fourteen months, the eurozone and sometimes other EU partners - with the help of the International Monetary Fund - have been forced to offer emergency loans packages to Greece, Ireland and Portugal.

"We continue to discuss the path we have so far taken. But it will be necessary to think about how we can widen and amend that path," Austrian Finance Minister Maria Fekter said.

The EFSF currently has a theoretical lending capacity of 440 billion euros, and despite the pledge to bolster this, politicians have not offered any concrete increased figures.

"If we stand together, no country will be at risk. We will do everything possible so that there is neither a risk of contagion nor a default by a member state of the eurozone," Luxembourg's Finance Minister Luc Frieden said in Brussels. "It will be difficult to convince the markets, but we all agree that everything has to be done to ensure the stability of the eurozone."

Judging by Tuesday trading, at least, the EU has not yet managed to convince investors that the problem is under control.

Author: Mark Hallam (Reuters, dpa, AFP)

Editor: Michael Lawton