Italy could face losing its economic competitiveness unless political leaders move quickly to carry out economic reforms to cut its debt and restart growth, the head of UniCredit , Italy's biggest bank, said on Saturday.

Chief Executive Federico Ghizzoni said internatonal lenders were not satisfied by the center-right government's austerity package aimed at balancing the budget since it failed to cut Italy's debt mountain or restart sluggish growth.

Sovereign risk stemming from lack of action on the economy could mean a growing spread between Italian bonds and benchmark German Bunds, threatening the Italian economy, he said.

If this consolidates over time, it risks putting us out of the game, the competitiveness of Italian business. It's important to reduce the spread, important to take a rapid decision to reduce the sovereign risk, Ghizzoni told reporters on the margins of a cultural event at the Italian embassy.

Standard & Poor's rating agency cut its rating on Italy's sovereign debt this week, citing poor growth prospects and political instability.

Ghizzoni said the euro zone's debt crisis was prompting U.S. lenders to pull funds from Europe, underscoring the need for the 17-nation currency bloc's leaders to reach a swift decision to resolve the crisis.

For UniCredit, Italy's biggest bank by assets, the financial crisis had not yet started to hurt the real economy, Ghizzoni said. Its corporate units in Italy, Germany and emerging Europe are in a very positive phase, Ghizzoni said. UniCredit is the biggest lender in eastern and central Europe.

This dislocation of assets (by U.S. banks) that we're seeing in the financial sector has not yet affected the real economy, he said. For us, diversification in Europe is a point of strength.

UniCredit and other Italian banks have had their share prices pummeled as investors fear the debt crisis could spread to Italy. Despite the lower share prices, Ghizzoni said takeover bids for Italian banks were unlikely in part because Italy's economic troubles would keep potential buyers away.

The banks that could be interested in Italy have the same kind of problems, he added.

(Editing by Sugita Katyal)

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