The Bank of Italy has forecast that the country's economy will shrink by between 1.2% and 1.5% this year depending on borrowing costs. This is a much sharper decline than the government's estimate of 0.4%.
"The uncertainty that surrounds the medium-term perspectives of the Italian economy ... are extraordinarily high and are directly linked to the evolution of the euro zone debt crisis," the central bank said in its economic bulletin.
The bank advanced two scenarios, each based on interest Italy must offer to borrow on sovereign bond markets.
The first scenario was calculated with a rate of about 7% currently demanded by investors for 10-year Italian debt and widely considered to be unsustainable. Under these circumstances, the bank said, the Italian economy would contract by 1.5% in 2012 and would remain stalled in 2013.
In a second scenario, under which borrowing prices fell by two percentage points from current levels, the economy would contract by a 1.2% in 2012 before rebounding by 0.8% next year.
Italy, the euro zone's third largest economy, saw economic activity contract by 0.2% in the third quarter of 2011, according to official data. The central bank expected it to have shrunk by an additional 0.5% in the last three months of the year, which would give an annual growth rate of 0.4%.
Italy must borrow around €450 billion this year, mainly to honour payments related to its huge existing debt.
