Fresh package of cuts and tax rises brings onslaught of criticism in Italy as French and German leaders prepare for talks to tackle debt crisis

Silvio Berlusconi's political future is on the line after rebellion broke out in his ranks over a tough new €45.5bn package of cuts and tax rises designed to erase Italy's budget deficit by 2013, fend off the markets and appease the European Central Bank.

Regional governors previously loyal to the prime minister queued up to bemoan the fallout for local services, with Lombardy's governor, Roberto Formigoni, calling the cuts "unsustainable", Veneto governor Luca Zaia denouncing them as a "mistake" and Rome's mayor, Gianni Alemanno, describing them as "unacceptable".

Among Italian newspapers reacting to the new "solidarity" tax hike for high-earning Italians, Il Giornale – which is owned by Berlusconi's brother – was the fiercest, saying "We are furious" in a front-page editorial and claiming that the PM was hitting his own electorate hardest.

Berlusconi himself appeared a shadow of his former ebullient self on Friday as he announced Italy's second austerity budget in as many months, blaming the global economic crisis. He said: "Our heart bleeds when we think that one of the good things about this government was that it had never put its hands in the pockets of Italians."

For Italian daily La Stampa, the cuts and tax increases, which must now be approved by parliament, are another nail in the coffin of the scandal-weakened prime minister. "A funeral has been celebrated where the man officiating and the man buried were one and the same – Silvio Berlusconi," it wrote.

Hastily concocted to satisfy the European Central Bank, which stepped in to buy Italian bonds last week after interest rates soared, the cuts have been criticised for threatening to strangle economic growth when Italy needs it most. But the decree also contains measures to liberalise the moribund Italian economy, seen as the best way to boost GDP and work off some of Italy's €1.9tn public debt, which has ballooned since Berlusconi took office.

The simplification of Italy's complex local government structure will see the scrapping up to 35 provincial councils and around 50,000 elected posts. Companies will have freer rein to negotiate contracts with staff, while a plethora of non-religious holidays will be shunted to Sundays to improve productivity.

But the decree offers no more than incentives to local authorities to privatise services and limited plans to open up Italy's closed-shop trade guilds, which help perpetuate the country's system of fixed prices and nepotism.

Meanwhile, German Chancellor Angela Merkel will meet French President Nicolas Sarkozy in Paris on Tuesday in their latest effort to get a grip on the mounting sovereign debt crisis in the eurozone.

The embattled leaders have promised to put forward "joint recommendations aimed at strengthening political and economic governance in the euro area", by the end of the summer.

After a nerve-shredding week in which French banks were hit by rumours of financial distress and official figures revealed that the French economy stagnated in the second quarter of the year, Sarkozy is keen to show that he is leading a fightback.

But experts are pessimistic that their meeting will yield a solution to markets' fears about the solvency of a growing number of European countries.

"Given the sequence of recent disappointments, we find it hard to be optimistic about policymakers' capacity to draw a line under the crisis in the near future," said Simon Hayes, of Barclays Capital. One option is a radical increase in the size of the eurozone bailout fund, the European financial stability facility, but that could meet stiff domestic opposition in Germany. Another proposal – one advocated by George Osborne – is for eurozone-wide bonds, but that would also be politically tricky.

As Sarkozy prepares to campaign for re-election, there are fears that the debt crisis could damage France's prospects. "There is a real danger that the intensification of the eurozone debt crisis will weigh down on the confidence of businesses and consumers, making them less inclined to spend and invest," said Diego Iscaro, of IHS Global Insight.

Italy and Spain have both rushed out emergency austerity plans in recent days to placate the European Central Bank, which reluctantly agreed to buy Italian and Spanish bonds last weekend, after a wrenching sell-off had raised fears that they could be unable to service their debts.

But analysts say the latest spending squeeze could prevent the economy from expanding for the next two years. "The budget cuts are likely to have quite negative effects on [the] short-term GDP-dynamic, given the already-fragile situation of private sector's financial balances. We expect Italian GDP growth to slow to close to zero in 2012 and 2013," said Giada Giani, of Citigroup.

Markets were calmer on Friday, after several countries, including France, imposed a ban on the short-selling of financial shares.