The Italian government will pass a sweeping package of cuts and tax increases at a cabinet meeting Friday as it scrambles to meet European Central Bank demands for action to shore up confidence in its public finances.

Prime Minister Silvio Berlusconi told local government representatives Friday that cabinet would adopt 20 billion euros ($28.5 billion) in austerity measures in 2012 and a further 25 billion euros the year after to bring the budget into balance by 2013.

Funding to regions and local governments would be cut by 6 billion euros in 2012 and 3.5 billion in 2013, while budgets for government ministries in Rome will be cut by 6 billion euros in 2012 and 2.5 billion in 2013, officials at the meeting said.

Earlier Berlusconi's office announced an emergency cabinet meeting at 7.00 p.m. (1700 GMT) to pass the measures aimed at reassuring panicked financial markets it can control public debt running at 120 percent of gross domestic product.

But the planned cuts were bitterly criticized by regional leaders who say local services from transport to health and welfare services have for years borne the brunt of austerity measures imposed by central governments in Rome.

For us, the fiscal measures which have been proposed are absolutely unjust, said Giuseppe Castiglione, head of the Union of Italian Provinces. When you talk about municipalities, you're talking about social services, when you talk about provinces, you're talking about schools, security at school, local roads, he said.

The measures expected to be adopted later Friday will include a solidarity tax on high earners, while Italian newspapers also reported that the center-right government was set to raise the tax level on financial income.

It is not yet clear how far the plans will affect the pensions system, a potentially sensitive area where Berlusconi's Northern League coalition allies and Italy's largest union federation, the CGIL have both opposed cuts.

Berlusconi met President Giorgio Napolitano and Bank of Italy Governor Mario Draghi Thursday as market pressure forced the government to bring forward plans for a cabinet meeting that was originally scheduled for next week.


The market turbulence which threatened to spin borrowing costs out of control last week has eased after the ECB stepped in to buy Italian bonds but heavy falls on the stock market have underlined the continuing fear among investors.

Friday, bourse regulator Consob announced a temporary ban on short-selling financial stocks in a bid to calm the volatility that has hammered Italian bank shares. The main Milan index traded nearly 2 percent higher early Friday.

Despite its huge public debt, Italy had remained largely on the sidelines of the euro zone crisis until last month when doubts about the government's unity and capacity to control finances triggered a massive selloff of Italian bonds.

The austerity package to be adopted Friday will fast-track a number of measures already contained in a 48 billion-euro package passed in parliament last month.

Business daily Il Sole 24 Ore said the solidarity tax would take the form of a 5 percent addition to tax on income above 90,000 euros and a 10 percent addition to tax on income above 150,000 euros.

The tax rate on financial income would go up to 20 percent from 12.5 percent with the exception of income from government bonds, it said.

Additional measures could include a rule ensuring that non-religious public holidays, such as the June 2 anniversary of the founding of the Italian Republic are celebrated on a Sunday in a bid to increase the number of working days in a year.

But major disagreements still remain, particularly over pension reform.

Potential changes include increasing the retirement age for women working in the private sector and curbing the system of early retirement based on pension contributions.

Thursday, Tremonti told a parliamentary committee the ECB had asked for a series of measures to break down barriers to competition in services and the professions and free up rigid labor market rules.

The recommendations included full liberalization of local public services and the professions, more flexible employment contracts, easier hiring and firing and public sector pay cuts.

Tremonti said the proposals on hiring and firing and cuts to public sector pay, both of which would raise fierce political opposition, were not in the government's plans.

(Writing by James Mackenzie; editing by Philippa Fletcher)