Italy's borrowing costs doubled in a closely watched bond auction that raised €11 billion in short-term debt, as tensions returned to bond markets.

€8 billion in 12 month bonds were sold at a rate of 2.84% - far higher than the 1.492% paid in March.

€3 billion due July 2012 went at 1.249% compared to 0.492% last month.

Borrowing costs had been on the decline in recent months after Prime Minister Mario Monti came to power in November.

He replaced Silvio Berlusconi who was ousted by a parliamentary revolt and a wave of financial market panic.

Investor jitters have returned to the markets this week due to mounting fears over global growth prospects following weak Chinese trade and US jobs data, as well as doubts over debt-laden Spain's ability to control its finances.

"Even though demand was stable as expected, the operation was impacted by the reigniting of tensions on euro zone sovereign debt and saw a sharp rise in rates," a Bank of Italy source said.

Monti has implemented a series of harsh austerity measures since coming to power at the head of a technocratic government and has launched a series of structural reforms aimed at liberalising the economy and boosting growth.

The Italian economy entered recession in the second half of last year, shrinking by 0.2% in the third quarter and 0.7% in the fourth. It is expected to contract further this year despite government reform measures.

The government is so far forecasting a shrinkage of 0.4% over the year but business daily Il Sole 24 Ore yesterday reported that the figure is about to be revised to a 1.3-1.5% contraction.

The government, however, has said it is on track to restore budget balance by 2013 and is predicting it will reduce the public deficit to 1.3% of GDP this year - far lower than other euro zone economies seen as vulnerable.

The European Central Bank provided the commercial banks with some €1 trillion of cheap funds in December and February, a massive boost to liquidity, with the aim of getting them to lend more money to business and so bolster growth.

In the event, many analysts believe that some of the flood of cheap cash went into the bond markets, thereby pushing down euro zone borrowing costs but the impact appears to have been temporary.

In marked contrast, Germany, paid sharply lower rates at a bond sale today as investors sought out the safety of the euro zone's biggest economy and paymaster.