Italy's austerity budget passed its first parliamentary hurdle Thursday but the opposition says Prime Minister Silvio Berlusconi's government is in a shambles and should resign after it is finally approved.

The four-year package, which has been increased to 48 billion euros ($68 billion) from 40 billion euros in the last 24 hours, is aimed at balancing the budget by 2014.

The upper house approved it by a margin of 161-135. It is due to be approved by the lower house Chamber of Deputies on Friday and signed into law several hours later.

Italy has avoided the worst of the financial crisis thanks to strong controls on public spending, a conservative banking system and a high level of private savings.

But with Greece and Ireland both in trouble, markets have been unnerved by a public debt level that is among the highest in the world at 120 percent of gross domestic product.

Italy's delicate position was underscored by a bond auction hours before the vote in which the Treasury managed to sell 4.97 billion euros of long-term paper but only by offering high yields, that analysts said were unsustainable.

Addressing the Senate shortly before the vote, Economy Minister Giulio Tremonti said Europe needed a political solution to the unraveling debt crisis because no country would be spared dire consequences.

No-one should have any illusions of individual salvation. Just like on the Titanic, not even the first class passengers will be saved, he said, referring to Europe's stronger economies.

The opposition voted against the measure but did not present amendments or carry out any filibustering tactics -- it hopes to show voters it is acting responsibly to overcome the crisis.

To underscore its resolve, the government called a confidence vote on the measure to streamline its passage.

Bond traders have targeted Italy, the euro zone's third-largest economy, because of doubts about its ability to sustain one of the world's heaviest debt burdens and fears it is getting sucked into a widening debt crisis.

COSTS UNSUSTAINABLE

Thursday's auction was seen as a vital test of Italy's ability to tap into the bond markets and keep refinancing a debt mountain equivalent to 120 percent of gross domestic product, second only to Greece in the euro zone.

But while nearly all of the bonds were sold, analysts said the rise in borrowing costs would be unsustainable in the long term.

The political consensus on debt-cutting measures earlier this week helped calm nervous markets, which picked up after suffering heavy losses last week and early this week.

The Democratic Party (PD), the largest opposition group, has demanded the resignation of Berlusconi's government, saying it is too weak to face up to the storm on financial markets.

But instead of aiming for potentially traumatic early elections immediately, the PD and other opposition forces have floated the idea of a transitional government to lead the country to the scheduled elections in 2013.

Berlusconi, who has steadfastly refused to resign despite a sex scandal and corruption trials, has emerged bruised from this week's financial crisis during which he has kept a low profile.

After attacking Tremonti in a newspaper interview last week which highlighted persistent cabinet divisions, he has not appeared in public to speak about the market turmoil. He only issued a written statement Tuesday.

Seen by international investors as a guarantor of Italy's financial stability, Tremonti's position appears to have been strengthened since the market turmoil, despite his tense relations with Berlusconi.

The opposition has demanded Berlusconi play no role in any transitional government and Tremonti has been touted by some as a possible key member, perhaps even as prime minister.

Massimo D'Alema, a former prime minister and currently an opposition leader, told the business newspaper Il Sole 24 Ore on Thursday the PD was willing to support a transitional government whose aim would be to weather the financial crisis, spur growth and make changes in the county's electoral laws.

Many observers say already tense relations between Berlusconi's People of Freedom party and its coalition partner the Northern League may develop into a full-blown government crisis, perhaps as early as September.

(Additional reporting by James Mackenzie and Giuseppe Fonte and Valentina Za in Milan; editing by Matthew Jones)