German Chancellor Angela Merkel said on Monday that Italy must demonstrate it is undertaking the budget reforms required to restore confidence in the euro zone, and she was confident that it would do so.

Italy must itself send an important signal by agreeing on a budget that meets the need for frugality and consolidation, she told a joint news conference with Icelandic Prime Minister Johana Sigurdardottir in Berlin.

I have full confidence that the Italian government will pass exactly this kind of budget, I discussed this yesterday with the Italian premier, said Merkel.

Merkel added that Germany agreed with other leaders of the euro zone that Greece needed fast approval of a second bailout package and her country would, with the rest of the European Union, do everything needed to defend the euro currency.

Germany and all euro partners are steadfastly determined to defend the stability of the euro, she said. Regarding Greece, I would like to say it must get a new program very quickly, within a very short time frame.

Top euro zone finance officials are holding critical talks on Greece and the worsening situation in Italy on Monday, with concerns about the risk of further sovereign debt contagion acute.

(Reporting by Stephen Brown, Sarah Marsh and Gernot Heller)

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