Italy raised €11 billion in two short term auctions but had to pay slightly higher interest rates to get investors to part with their cash.

Particularly noteworthy was the increase in the interest rate on the one-year bonds to 1.91% from 1.69% on the previous issue.

Demand was strong however, the auction results indicated.

Over recent weeks, Italy has not been a primary focus in Europe's debt crisis. 

The yield on the country's 10-year bonds has dropped below a manageable 5% as investors have given their backing to the economic strategy of the government led by Premier Mario Monti.

Earlier, Italy's government unexpectedly cut income tax rates for the country's lowest earners by a percentage point.

It also promised to stick to the budget goals it has agreed with the European Union.

After an eight hour cabinet meeting that ended early this morning, the government said it would also halve a planned increase in sales tax rates to a single percentage point.

Italy holds parliamentary elections in about six months.

"Today we can see that budget discipline pays and makes sense" because "we can allow ourselves some moderate relief," Prime Minister Mario Monti told reporters after the meeting.

The severe austerity imposed by Monti since he took over an unelected government in November has exacerbated a year-long recession in the euro zone's third-biggest economy.

He increased taxes and cut pensions to put the public accounts on track and head off a Greek-style debt disaster.

Monti has repeatedly denied he would stand in the election but did say he would serve his country again if asked following the vote.

The Italian government said it will reduce the two lowest income tax rates by a percentage point.

The rate will drop to 22% from 23% for those earning less than €15,000 a year, and to 26% from 27% for salaries between €15,001 and €28,000. The top three rates will remain unchanged.

Italy will balance its budget in structural terms next year, as it has pledged its EU partners it would do, according to a statement from the cabinet meeting.

A second round of cuts to health care spending and other state expenditure, a new tax on financial transactions and "fiscal interventions" for banks and insurance companies will help pay for the measures, according to a statement.

The savings should amount to €3.5 billion a year when fully implemented, the government said. Savings from a previous round of spending cuts will total €4.4 billion this year, and €10.3 billion next year.

A reform to the constitution to centralise spending controls over the country's 20 regional governments, which have been the focus of a recent series of high-profile corruption scandals, was also decided during the cabinet meeting.

That will involve reforms designed to regain coordination of spending on energy, tax collection, and the national transportation network.

To address corruption, the position of anti-corruption commissioner, who will be given investigative powers, will also be created with the passage of the budget.