Prime Minister Mario Monti met unions on Sunday to build support before the cabinet approves a 20-billion-euro package of austerity measures aimed at shoring up Italy's strained finances and stemming a crisis that threatens to overwhelm the euro zone.

Ministers are scheduled to sign off on the package of tax increases and spending cuts on Monday, though sources in the prime minister's office said the cabinet meeting may be brought forward to Sunday afternoon.

Expected measures include an increase in the retirement age for many workers, liberalisation of professional services, a hike in income tax for higher income brackets and new taxes on private assets and housing.

The measures come at the start of one of the most crucial weeks since the creation of the single currency more than a decade ago with European leaders due to meet on Thursday in Brussels to try to agree a broader rescue plan for the bloc.

Italy, with a public debt of around 120 percent of gross domestic product, has been at the centre of Europe's debt crisis since yields on its 10-year bonds shot up to around 7 percent, similar to levels seen when countries such as Greece and Ireland were forced to seek a bailout.

Adoption of the package is seen as vital for re-establishing Italy's shattered credibility with financial markets after a series of unfulfilled promises by the previous centre-right government of former Prime Minister Silvio Berlusconi.

Unions said the cuts will hit poorer workers and pensioners hard but there was broad political support for Monti's plan, which is expected to be approved in parliament before Christmas.

The choice isn't between a light package and a tough package, it's between a tough package today and the risk of bankruptcy for the country tomorrow, Angelino Alfano, secretary of the centre-right PDL party told SkyTG24 television.

With Italy, the euro zone's third-largest economy, close to a debt emergency that would destroy Europe's financial defences, EU leaders will meet in Brussels this week hoping to agree steps to bind the bloc more closely with tougher fiscal rules.

SEVERE

Sources present at discussions on the new fiscal measures said they would total around 20 billion euros ($27 billion).

An extra 4 billion euros would come from automatic cuts to tax breaks and welfare measures outlined but not clearly identified in the austerity package presented by the previous government.

Monti will have to balance the competing needs of showing budget rigour while not choking off growth, without which it will be impossible to reduce a 1.8-trillion-euro debt mountain.

About half of the overall package will be used to cut the budget deficit and help balance the budget by 2013 despite the economic downturn and rising borrowing costs.

The other half will free up resources to try to regenerate Italy's chronically stagnant economy, which is widely expected to go into recession next year.

Changes to pensions will be key in the new reform plan, with eligibility requirements toughened up for so-called seniority pensions which are based on a combination of workers' age and the years for which they have paid contributions.

Programmed cuts to the national health service budget are expected to be accelerated by one year, to reduce spending by 2.5 billion euros in 2012 and 5 billion euros from 2013, a local government source said.

A local housing tax (ICI) may also be reintroduced, bringing in estimated revenue of at least 3.5 billion euros per year, although this total could increase depending on possible adjustments to the assessment basis on which the tax is raised.

Other expected measures include further increases in value added tax rates and a ban on cash transactions above 500 euros in an effort to tackle tax evasion.

But the package will contain no reform of job contracts which hinder companies from laying off workers, a measure seen as key to overhauling the labour market but which is bitterly opposed by unions.

($1 = 0.7446 euros)

(Writing By Catherine Hornby and James Mackenzie; Editing by Sophie Hares)