The International Monetary Fund has called for decisive action by Italy to reduce its debt.
The cost of borrowing for the Italian government has risen in recent days because of concern that the crisis in Greece could spread to larger eurozone economies.
'While the economy has strengths, the public debt is high and growth is expected to remain constrained because of long-standing structural bottlenecks,' the IMF said.
In its periodic review of the Italian economy, the IMF board called the government's recent medium-term fiscal plan 'an important step' toward cutting its deficit to below 3% of GDP by 2012 and almost 0% by 2014.
But it suggested there was little room for error given the testiness of markets for eurozone debt.
'The main downside risk comes from market turmoil in the euro area periphery,' the IMF said.
'Another decade of stagnation also poses a major risk.'
The Italian government earlier this month announced a four-year austerity budget worth €40bn in a bid to slash its deficit, as it faced worries about its ability to service a debt load that amounts to an extremely high 119% of GDP.
'Decisive implementation of the package is key,' the IMF said, suggesting that some accelerated spending measures might help quell the worries in the markets.
'The main policy goals should be to continue pursuing fiscal consolidation to reduce the large public debt, maintain financial sector stability, and boost growth potential through structural reforms.'
The report came as Italian bonds fell under attack in the markets and Italian stocks plummeted, with investors worried the government's heavy debt burden would push Europe's third largest economy down the path of Greece, Portugal and Ireland, and pull struggling Spain with it.
Elsewhere, the International Monetary Fund has said Greece needs an additional €71bn in European Union aid and €33bn from private creditors to weather its debt crisis.
The IMF, in a report on the state of its massive loan to Athens, said it intended to continue its financing, but predicted a deeper 2011 recession than previously thought in Greece, with the economy contracting 3.9%.
The IMF also pushed back Greece's return to debt markets to 2014.
The country's credit rating has been further downgraded by Fitch tonight.
Meanwhile, it is understood that a proposed summit of eurozone leaders is now less likely to go ahead this week.
A well-placed source told RTÉ News that European Council President Herman Van Rompuy was looking for "looking for dates that suit 17 leaders. Friday seems difficult'.
There have been contradictory statements throughout the day between Berlin and Paris over whether or not an emergency summit would go ahead.
