Italy's borrowing costs jumped to record levels on Friday, underlining its vulnerability at the heart of the euro zone debt crisis and scepticism about whether the struggling government of Prime Minister Silvio Berlusconi can deliver vital reforms.
The 6.06 percent yield paid at an auction of 10-year bonds was the highest since the launch of the euro, and not far from the level reached before the European Central Bank intervened in August to cap Rome's borrowing costs by buying Italian debt.
Italy, the euro zone's third largest economy, is again at the centre of the debt crisis, as fears grow that its borrowing costs could hit levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome.
In a speech in Rome, Berlusconi insisted that Italy would meet its target of balancing the budget by 2013.
Tainted by scandal and repeatedly at odds with his coalition allies, Berlusconi has promised European partners a package of measures to spur Italy's stagnant economy and cut its towering public debt, but has failed to convince markets made sceptical by his repeated failure to deliver reforms.
European leaders welcomed a letter of intent on reforms that he delivered to their summit last Wednesday, but emphasised that the measures must now be implemented.
"The interest rates that they are paying are punitive," said Monument Securities strategist Marc Oswald. "Italy ... is still the 'bete noire' of the whole euro zone problem."
"They are still going to carry on having to pay higher yields unless they come up with reform plans and implement them. But anyone who expresses an optimistic opinion about that is probably looking through rose-tinted glasses," he added.
France and Germany have expressed open exasperation at a succession of unfulfilled reform promises by Berlusconi, and fear the crisis in Italy could spark a wider emergency that would threaten the very existence of the single currency.
Even if a weakened government manages to pass the promised reforms, most will not come into force until mid-2012. Markets are unlikely to remain patient for so long.
In his speech Berlusconi took aim at the euro, calling it a "strange" currency.
"There is an attack on the euro which as a currency has convinced no-one, because it belongs to more than one country but does not have a bank of reference and guarantee," he said, referring to reluctance by Germany and other countries to allow the European Central Bank to be used as a lender of last resort.
He later issued a statement saying his words had been interpreted in a "malicious and distorted" way.
"The euro is our currency, our flag. It is precisely to defend the euro from speculative attacks that Italy is making great sacrifices," the statement said.
Berlusconi, who is facing two court cases for accusations of fraud and one for allegedly having sex with an underage prostitute, complained that he faced 37 judicial hearings between now and mid-January. He says leftist magistrates are persecuting him in an attempt to undermine democracy.
Speaking after Wednesday's summit, French President Nicolas Sarkozy addressed fears that the crisis could spread to Italy.
"If we had allowed Greece to fall, and the speculation shifted on to attack Italy, the markets would then have said we will allow Italy to fall too, and that would be the end of the euro," he said in a television interview.
As Italy sinks deeper into the debt crisis, tensions in the government have grown sharply, prompting widespread speculation in the press and even Berlusconi's party that the government will fall, leading to an election in 2012, a year early.
Berlusconi, whose ratings have been torpedoed by a mix of scandal and economic and political problems, rejected speculation that he might be forced into an early election.
He said his alliance remained solid with the pro-devolution Northern League party, whose leader Umberto Bossi has expressed open scepticism about the survival of the coalition.
"There is an absolute need for political stability and Bossi thinks exactly the same way I do. The pact we have with the League has never been up for discussion," Berlusconi said.
"No credible political alternative exists."
This week the League rejected plans to raise the pension age to 67, leading to tense late-night talks before a compromise was reached in time to take to the summit in Brussels.
The proposals, including an increase in the pension age, rules making it easier to lay off staff and provisions to place civil servants in special redundancy schemes, have raised fierce opposition from unions and scepticism about whether they will ever be implemented.
In Italy's increasingly murky politics, there has been speculation that the package is part of a deal between Berlusconi and Bossi to take the government to the end of the year before triggering an election in the spring.
On Friday, Berlusconi dismissed such suggestions and said an election campaign in the middle of the crisis would be "very seriously damaging to Italy".