Prime Minister Mario Monti accelerated plans on Sunday to approve a 20 billion-euro austerity package aimed at shoring up Italy's strained finances and stemming a crisis that threatens to overwhelm the euro zone.
A cabinet meeting on the package of tax increases and spending cuts originally scheduled for Monday was brought forward to 1500 GMT (11 a.m. EST) on Sunday after meetings with party leaders and unions, the prime minister's office said.
Expected reforms include an increase in the retirement age for many workers, liberalization of professional services, a hike in income tax for higher income brackets and new taxes on private assets and housing.
The measures come before 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 and Friday in Brussels to try to agree a broader rescue plan for the bloc.
The choice is between adopting tough austerity measures and starting the euro rescue, or Italy not being able to stand on its feet, and we risk the collapse of the euro, said Emma Marcegaglia, head of Italian employers' lobby Confindustria.
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 disproportionately hard, but there was little sign of serious political opposition to Monti's plan, which is expected to be approved in parliament before Christmas.
With Italy, the euro zone's third-largest economy, close to a debt emergency that would destroy Europe's financial defenses, EU leaders will meet in Brussels this week hoping to agree steps to bind the bloc more closely with tougher fiscal rules.
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 rigor 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 is expected to 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.
The minimum number of years workers have to pay contributions is set to go up to 42 years for men and 41 years for women from its current level of 40 years. Inflation indexing will be cut back, leaving only the lower brackets of pensions fully indexed.
Susanna Camusso, leader of Italy's biggest union CGIL, said the reforms would be an extremely heavy blow for pensioners and said she would propose that parliament make some amendments.
Planned 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.
Graziano Delri, head of Italy's local government association, said 10-11 billion euros would be raised from property taxes, with the reintroduction of a tax on principal residences that was scrapped by Berlusconi.
Scrapping the so-called ICI housing tax in 2008 cost Italy an estimated 3.5 billion euros annually but the 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 1,000 euros in an effort to tackle tax evasion.
But the package will contain no reform of job contracts that hinder companies from laying off workers, a measure seen as key to overhauling the labor market but which is bitterly opposed by unions.
($1 = 0.7446 euros)
(Writing By Catherine Hornby and James Mackenzie; Editing by Sophie Hares and Alessandra Rizzo)