Prime Minister Silvio Berlusconi sought on Tuesday to calm fears that Italy could be swept into a full-scale financial crisis as the center-left opposition pledged to help parliamentary approval of debt-cutting measures.

For us, for Italy, this is certainly not an easy moment, Berlusconi said in a statement that followed a chaotic morning on financial markets in which Italian 10-year bond yields climbed past 6 percent, their highest level in over a decade.

Economy Minister Giulio Tremonti left a meeting of euro zone finance ministers early to return to Rome to wrap up approval of a 40 billion euro ($56 billion) package of austerity measures expected to be passed in parliament in the coming days.

The actions under discussion in parliament will accelerate the reduction of the debt. Already this year, we will bring the primary balance into significant surplus, Berlusconi's statement said.

The crisis is pushing us to accelerate the process of correction extremely rapidly, to strengthen its content, to fully define further steps to bring the budget into balance by 2014.

Opposition parties said that despite objections to parts of the package, which cuts funding to local government and health services and delays retirement, they would support parliamentary approval of the bill by Friday so that it would be passed by the time markets open on Monday.

With Italy sitting on 1.6 trillion euros of outstanding government bonds, any increase in borrowing costs could severely disrupt efforts to cut a debt mountain equivalent to 120 percent of gross domestic product.

Earlier, the premium investors demand to hold Italian debt rather than benchmark German bonds widened to a record 350 basis points. Bank shares also dropped heavily before markets picked up following Tremonti's return home.

SACRIFICES

Any delivery from the government on the austerity package, any good news in that respect, is very, very positive. So if politicians are getting their act together, it's absolutely good news, said Royal Bank of Scotland analyst Paola Biraschi.

As the morning panic on the markets eased, the 10-year Italian/Bund spread dropped back to 288 points, 15 basis points tighter on the day, after an auction of short-term bills (BOTs) passed off without any serious problems.

Italy, the euro zone's third largest economy, has largely avoided the turmoil hitting Greece, Portugal and Ireland, thanks to a relatively modest budget deficit, a conservative banking system and a high level of private savings.

But it has been targeted over worries about the sustainability of its mountainous public debt burden, raising the threat of a crisis which could potentially overwhelm the euro area and break up the single currency.

Tremonti has overseen a four-year, 40 billion-euro austerity package designed to keep the government on track to meet a target of cutting the public deficit from 3.9 percent of GDP in 2011 to bring it into balance by 2014.

With the opposition ready to support the package, a number of smaller amendments were discussed late on Tuesday, including easing rules on amortization of infrastructure assets held by private concessionaires and changes to tax and pension measures.

The changes would see planned tax hikes on holders of financial instruments eased for small investors, while rules on inflation adjustment for pensions would be weighted against higher incomes and in favor of lower and middle incomes.

The government was also working on a measure that would ensure that 15 billion euros of fiscal measures penciled into its austerity plan were cemented into the final package.

Tremonti has faced reluctance and even outright resistance from some in the government worried about the electoral impact of unrelenting austerity but this week's crisis appears to have overcome such resistance.

In a gravely worded statement, Berlusconi, who normally exudes optimism and who has hitherto boasted of his government's success in keeping out of the crisis, said Italy had overcome even more difficult moments in its past.

We must be united, cohesive in our common interest, conscious that the efforts and sacrifices of a brief period will correspond to permanent and secure gains, he said.

Markets plunged on Friday after a newspaper interview in which Berlusconi criticized the sometimes abrasive Tremonti for not being a team player, a remark which underlined persistent tensions in the government.

(Additional reporting by Francesco Guarascio in Brussels, Ian Simpson in Milan, Giuseppe Fonte in Rome; Editing by Alison Williams)

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