The Italian parliament begins debating a much criticized austerity package on Tuesday after President Giorgio Napolitano issued a stark warning that urgent action was needed to restore trust in public finances.

Italy's largest trade union, the CGIL, has called a general strike against the measures and plans rallies across the country on Tuesday, underlining the air of emergency in the euro zone's third largest economy.

In a statement after markets closed, Napolitano said a selloff of Italian government bonds on Monday had sent an alarming signal that markets had lost faith in Italy.

It is a sign of the persistent difficulty in regaining trust as is urgently and indispensably required, he said, adding that he urged all parties not to block measures needed to restore credibility.

He said there was still time to insert measures capable of reinforcing the efficiency and credibility of the austerity package passed in parliament last month which is currently undergoing revision.

Tuesday's debate in the Senate is due to start at 4.30 p.m. (1430 GMT) with upper house approval possible as early as Wednesday after the center-left opposition Democratic Party said late on Monday it was willing to allow a swift vote.

The package would then move to the lower house before final approval, originally expected by September 20.

The European Central Bank has been shielding Rome from the full force of the market by purchasing Italian bonds in a bid to hold down yields and stop borrowing costs from flying to unsustainable levels.

But its patience has been stretched by the chaotic manner in which the austerity package has been handled and by the absence of concrete steps to meet the government's pledge of balancing the budget by 2013.

On Monday, Mario Draghi, who takes over as head of the ECB in November, stepped up calls for Italy to act, delivering a pointed warning that the central bank's willingness to continue buying bonds should not be taken for granted.

YIELDS CLIMB

In a clear sign of rising market worries, yields on Italian 10 year bonds climbed to nearly 5.6 percent on Monday, approaching the levels of more than 6 percent seen before the ECB began buying bonds last month.

The premium investors demand to buy Italian bonds rather than benchmark German debt widened to 369 basis points, more than 30 points higher than the equivalent Spanish spread as Italy has moved firmly to the center of the euro zone crisis.

Italy's European partners have been watching with mounting alarm as government wrangling has overshadowed the package and German Chancellor Angela Merkel told members of her party on Monday that the situation in Italy was extremely fragile.

Italy has wrestled with sluggish growth and one of the world's highest levels of public debt for years but a modest deficit, high private savings and a conservative banking system had kept it largely on the margins of the crisis until July.

Berlusconi's government, which until recently boasted repeatedly of keeping Italy out of the crisis, has struggled to build a defense against the market pressure, hampered by deep divisions in its own ranks over tax and pension issues.

Measures ranging from a tax on high earners, retirement delays for some university graduates, cuts to local government funding proposed or the abolition of small town councils have been proposed and then dropped with bewildering speed.

In their place, the increasingly beleaguered Economy Minister Giulio Tremonti is putting his faith in stepped up measures to combat tax evasion despite a long history of failure by successive Italian governments.

Berlusconi and Tremonti have appeared increasingly at odds over the package, heightening speculation of a possible political crisis which could bring down the government.

Further complicating the picture, Berlusconi has also been hit by a fresh legal case, following the arrest of a businessman last week on charges of attempted extortion of the premier in connection with a two-year old prostitution scandal. (Editing by Myra MacDonald)

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