The European Central Bank's incoming president has signalled that the bank is ready to carry on buying the bonds of troubled euro zone governments, suggesting he is ready to intervene to steady markets in the face of German concerns.
Mario Draghi also said the 17-nation euro area faces significant growth risks - a comment that hints that he may be ready to support a cut in interest rates soon after he takes over from Jean-Claude Trichet next week.
The Italian made the comments as European leaders headed to Brussels for a crunch summit aimed at getting a firm grip on the euro zone debt crisis, with France and Germany at odds over how much the ECB should be involved in the policy response.
"The Eurosystem is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission," Draghi said at a conference in Rome.
The ECB's non-standard policy measures - the crisis response it has rolled out on top of interest rate policy moves - have also included the provision of unlimited liquidity to banks, and purchases of covered bonds.
In its latest provision of funds, the ECB lent banks €57 billion today in the first of two new offerings of one-year loans designed to give institutions greater funding security and neutralise the threat of a new credit crunch.
In his Rome comments, Draghi used language similar to that employed by the ECB to explain the reactivation of its bond-buying programme in August, when it said the programme was aimed at "restoring a better transmission of our monetary policy decisions taking account of dysfunctional market segments".
The central bank launched its bond-buying plan in May last year, intervening in debt markets to lower the borrowing costs of countries hit by the debt crisis that has since escalated and now risks tipping the world's leading economies into recession.
The decision to reactivate the programme in August and buy the bonds of Italy and Spain came after they appeared to be getting dragged into the debt crisis.
The decision was far from unanimous, however, and led to the resignation of Jurgen Stark - the second heavyweight German policymaker to quit the ECB this year over the plan.
Bundesbank chief Axel Weber, who had been in pole position to succeed Trichet, departed in April and in doing so opened the way for Draghi to take the ECB presidency.
Trichet had signalled that the ECB was looking to withdraw from the bond-buying policy once the euro zone's EFSF rescue fund gained new powers to intervene on bond markets.
Italy pays higher rates to borrow
Earlier, Italy paid sharply higher rates to borrow €10.5 billion in a sign of investor unease ahead of a key EU summit at which premier Silvio Berlusconi is expected to unveil last-minute economic reforms.
Rome issued €8.5 billion in six-month bonds as well as €2 billion in two-year treasury bonds with a demand of over €17 billion, the Bank of Italy said. Yields on six-month bonds rose sharply to 3.535% compared to 3.071% in a similar sale on September 27 while the interest on the 2-year coupons rose to 4.628% from 4.511%.
Despite adopting draconian austerity measures over the last few months in order to balance Italy's budget by 2013 and reduce its colossal debt mountain of $1.9 trillion, Rome has not managed to reassure investors.
