ECB President Jean-Claude Trichet stepped up warnings over Italy's strained public finances on Saturday, telling the struggling center-right government it must act quickly to reassure nervous markets.
Prime Minister Silvio Berlusconi, hit by a renewed bout of scandal this week, has caused growing alarm over the failure of his divided government to pass clear measures to cut back Italy's 1.9 trillion euro ($2,726 billion) debt mountain.
Speaking after a week of steadily rising market pressure on Italian bonds, Trichet repeated that the government had to meet last month's pledge of a clear plan to balance the budget by 2013 and pass reforms to boost Italy's stagnant economy.
This is absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and its creditworthiness, he told a conference in the northern Italian town of Cernobbio.
The European Central Bank, which has been buying Italy's bonds in the market to try to hold down yields and stop its borrowing costs spiralling out of control, has been stepping up warnings that Rome must act quickly.
There has been some speculation that it might reduce its purchases to put pressure on Rome to act more quickly to pass a much disputed 45.5 billion euro package of austerity measures now going through parliament.
However, any sign of the ECB cutting back its bond-buying programme would risk triggering a market selloff that could tip the euro zone's third economy into a Greek-style emergency.
According to participants at a closed-door session in Cernobbio, Trichet declined to speak about the programme.
I'm not going to tell you what we're doing on bond buying but we have a meeting next week, Trichet told the conference, according to three different witnesses, apparently referring to next week's regular Governing Council meeting.
Underlining the growing urgency of the situation, the premium investors demand to hold Italian debt rather than benchmark German bonds rose on Friday to 331 basis points, the highest since the ECB started buying Italian paper in August.
Yields on 10-year Italian bonds ended the week at 5.29 percent, creeping back up toward the 7 percent level generally regarded as unmanageable.
Italian President Giorgio Napolitano said successive governments had failed to prevent a mountainous public debt from getting out of control, and swift action was essential.
We have hesitated from resolutely and coherently addressing constraints that should have been loosened and broken from the heavy weight of accumulated public debt, he told the meeting.
Napolitano has played a prominent role in the crisis, using his authority as head of state to cut through political rivalries and broker a series of agreements on budget measures.
But cabinet divisions have hampered efforts to finalize the package. Economy Minister Giulio Tremonti appears increasingly at odds with Berlusconi and the rest of the government.
Speculation persists that the government may fall before the end of its term in 2013, perhaps to be replaced for a limited time by a government of technocrats.
Napolitano declined to comment when asked if the current government was in a position to tackle the situation.
Should there one day be a government crisis ... I will take my responsibility, as per my mandate, of proposing a solution, he told a question-and-answer session.
On Saturday, Berlusconi's office denied a report in the daily Corriere della Sera that he had attacked Tremonti's insistence on budget rigour even at the expense of economic growth, the latest in a long series of such reports.
Disagreements over taxes and pensions have led to a series of U-turns over the past week. A tax on high earners and a rise in the pension age have been proposed, then dropped within days.
Doubts about Berlusconi's focus on the austerity plan were heightened this week when magistrates arrested a businessman linked to a 2009 prostitution scandal on suspicion of trying to extort as much as half a million euros from the premier.
Berlusconi has denied making any illicit payments, accusing what he calls politically motivated magistrates of trying to bring him down and dismissing the case as absurd.
He has survived dozens of scandals over issues ranging from tax fraud to underage prostitution and the impact of the latest affair is unclear but newspapers have printed extensive extracts of wiretapped conversations which could prove damaging