Italy's parliament is expected to approve a much revised austerity plan on Wednesday as Rome struggles to stem a debt crisis threatening the entire euro zone.

The 54 billion euro ($73.8 billion) mix of tax hikes and spending cuts aimed at balancing the budget by 2013 was agreed under heavy pressure from the European Central Bank, which has demanded tough action from Italy to cut its massive debt.

To speed approval, Prime Minister Silvio Berlusconi's center-right government called a confidence vote for 1200 GMT (8 p.m. EDT) in the lower house which would force it to resign if it lost.

A formal approval vote for the measure, which has already been passed by the upper house, is expected at around 1800 GMT (2 p.m. EDT).

The center-right government's majority in the lower house should ensure the package passes into law without problem, despite weeks of coalition bickering over its content.

The focus then shifts to whether a weak and scandal-plagued government can push through the reforms and stem a crisis that has driven Italy's borrowing costs close to unmanageable levels.

Now the key is determination and implementation of the measures, International Monetary Fund Managing Director Christine Lagarde told La Stampa daily.

It's the only way to convince markets and other partner countries of the seriousness of the initiatives taken.

Markets already on edge over Greece have turned on Italy with a vengeance over the past two months, hammering bonds and banking stocks amid doubts about its economy and the sustainability of a 1.9 trillion euro debt mountain.

An auction of long-term bonds on Tuesday saw 6.49 billion euros of securities sold but forced the Italian Treasury to offer record interest on 5-year paper.

Only ECB bond buying has held back market pressure but the steady rise in yields over the past week shows how much sentiment has turned against Italy.

Yields on Italy's 10-year bonds hovered near 5.7 percent on Wednesday, not far off levels of just over 6 percent seen before the ECB intervention.

The spread over benchmark German debt eased to 385 basis points on Wednesday after topping 400 points on Tuesday.

Milan's blue-chip stock index also pared back early losses to rise 1 percent in early afternoon trade.


Too big to bail out like smaller Greece and Ireland, Italy -- the euro zone's third largest economy -- has the potential to trigger a breakdown that could tear the single currency apart.

Italy is the key to contain this crisis, said Domenico Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution.

It is the last window of opportunity before a serious prospect of a meltdown of the euro.

Plagued by sex scandals, Berlusconi's previous boast of having kept Italy out of the debt crisis has been destroyed by the turmoil and there have been rising calls for him to step down.

His fractious coalition fought over the austerity package for weeks, chopping and changing the plan four times and increasing market concern, before the final version was agreed in the face of opposition to central parts of the plan by Economy Minister Giulio Tremonti.

Tremonti is increasingly isolated and his personal position appeared shaky earlier this year when a former aide, Marco Milanese, was probed for corruption.

In a small boost for the minister, a parliamentary committee on Wednesday narrowly rejected a request by magistrates to arrest Milanese. But the full house must now vote on the request.

Wednesday's confidence vote comes against a backdrop of growing disgust among Italians over the failings of the political class and what many see as an unfair austerity plan that fails to hit the rich and corrupt.

Riot police took up positions around parliament ahead of the vote in preparation for expected protests. They were forced to use tear gas and baton charges to disperse demonstrators when the Senate approved the package last week.

Along with a public debt burden that is second only to Greece in the euro zone at 120 percent of gross domestic product, Italy has one of the world's most sluggish economies, making long-term debt reduction almost impossible.

Italian officials have already said that further measures could be introduced once the austerity package is passed, with possible options including the sale of state property holdings and other assets as well as longer term structural reforms to spur growth.

The measures included in Wednesday's austerity package include a one percentage point increase in value added tax, bringing forward plans to increase the pension age for women and a special levy on energy companies.

($1=.7317 Euro)

(Editing by Barry Moody)