Italian authorities will meet on Tuesday to discuss growing market turmoil that has sent borrowing costs spiraling to dangerous levels and threatened to drag Italy into full-scale crisis.

Officials said Economy Minister Giulio Tremonti would chair the Financial Stability Committee -- made up of representatives from the economy ministry, the Bank of Italy, market regulator Consob and insurance authority ISVAP.

Treasury director general Vittorio Grilli will attend via conference call and Bank of Italy deputy Fabrizio Saccomanni will also be present. A brief statement may be released after the meeting, expected at around 4.30 p.m (1430 GMT).

Earlier on Tuesday, President Giorgio Napolitano met Bank of Italy Governor Mario Draghi for the second time since last Thursday.

The yield spread on Italian 10-year BTP bonds against German Bunds hit a euro-era high of 385 points, with yields on Italy's 10-year bonds climbing above 6 percent, a level generally seen as unsustainable in the long term.

Yields on Spanish and Italian five-year bonds briefly reached parity for the first time since March 2010, a concrete sign markets were beginning to regard Italy in the same way as debt strugglers Spain, Portugal or Greece.

Concern is growing in Spain too with Prime Minister Jose Luis Zapatero delaying his holiday "to more closely monitor the evolution of the economic indicators," a government spokesman said.

A bailout of either Spain or Italy would probably overwhelm the euro zone's existing rescue funds.

Despite having one of the world's heaviest public debt burdens, Italy has until recently stood aloof from the euro zone crisis thanks to a relatively modest budget deficit, high private savings and a conservative financial system.

But doubts about the government's ability to cut the debt as targeted and implement the kinds of tough reforms needed to spur its stagnant economy into sustained growth have caused growing alarm on financial markets.

Uncertainty over the position of Tremonti, who has appeared estranged from Berlusconi and has been weakened by a scandal affecting a close former aide, have also unsettled investors who have long seen the economy minister as an anchor of stability.

ALARM

The turbulence which has hit the euro zone's third largest economy, which would be far too big for the kind of assistance European authorities have offered to prop up Greece and Ireland, has caused deep alarm across the euro zone.

Prime Minister Silvio Berlusconi, who has said little in public since bond yields began climbing last month, is due to address parliament on Wednesday.

Europe's financial establishment sought to offer reassurance.

The European Commission said it was confident of Italy's ability to face the crisis and Angel Gurria, head of the Organization for Economic Cooperation and Development, said Rome was on the right track.

"They have the deficits under control, they have the public finance under control, so they are starting from a high point after the crisis but they are doing the right things, they are taking the right decisions," he told Reuters in an interview.

Baudouin Prot, head of BNP Paribas, one of France's biggest banks, which has some 24 billion euros in Italian sovereign debt and a large local retail operation, said there were no plans to cut its exposure to Italy.

"We usually don't give any guidance as to a result or a risk, and we're going to manage our exposure but I have no plan to do so," he told Reuters Insider Television.

With some 1.6 trillion euros of bonds outstanding and 157 billion maturing by the end of 2011, a full-scale crisis in Italy would trigger much wider problems, dragging in banks across the region and threatening the whole euro zone.

Italy's blue-chip share index fell to its lowest in more than 27 months in early Tuesday trade, dragged down by losses in banking stocks. The index has fallen around 13 percent over the past month as pressure has grown on Italian assets.

Because of their vast holdings of domestic government debt, Italian banks have born the brunt of the selloff. Big Italian banks have lost more than 20 percent of their value this year and are trading at historically low valuation multiples.