Italy slashed its 2012 economic growth outlook to -1.2% from -0.4% today.
The change means it will miss its 2013 target for a balanced budget, the government said.
Draft documents approved by the government show it intends to delay by a year its plan to balance the budget in 2013 due to a weakening economic outlook.
"Despite the progress made, there is still a long way to go in a context that is more favourable but still characterised by elements of uncertainty," a report that accompanied the new forecasts said.
The draft economic and financial document, which has been obtained by the Reuters news agency, raises the budget deficit forecasts for 2012-2014 and slashes this year's economic growth outlook.
Italy's budget deficit is already one of the lowest in the euro zone as a proportion of output and many economists say its chronically weak growth is more of a concern than fiscal slippage.
Under former Prime Minister Silvio Berlusconi Italy promised its European partners last summer that it would balance its budget in 2013, bringing forward the previous 2014 target to try to reassure markets as Italian bond yields surged.
Now Monti's technocrat government is poised to revert to the old 2014 target as the economy contracts sharply, weighed down by a series of austerity measures approved to accelerate deficit reduction.
Monti was hailed as a saviour when he replaced Berlusconi in November as Italy appeared to be heading towards a Greek-style debt crisis, but his popularity is declining and his reforms are drawing rising criticism and resistance.
A similar move by Madrid earlier this year to weaken its deficit target sent yields on Spanish debt sharply higher. However, Spain's deficit is much larger than Italy's and is considered to be a bigger problem.
The Italian economy is forecast to contract 1.2% this year, according to the document, compared with a 0.4% decline in GDP projected by Monti's government in December.
