Italy starts new austerity measures after bond auction

The "phase two" of his cabinet's measures, or "Grow Italy", would especially focus on promoting economic growth and enhancing competitiveness, Monti said at the traditional end-of-year media conference.

The new phase would further implement the three pillars of rigor, fairness and growth at the center of the first 30-billion-euro (38 billion U.S. dollar) package of the austerity plan approved by parliament last week, he explained.

Monti stressed Italy's crucial role in the European Union (EU) and in the world economy, but saying that "the international markets' instability is above all an EU-level problem, which needs a response of solidarity and community."

The EU itself needs to discipline its public balance and strengthen its economic union through allocating more consistent funds to aid those countries in need and enhancing economic dynamism in order to stimulate growth, he said.

On Thursday, the Italian Treasury raised a total of 7 billion euros (about 9 billion dollars) of long-term government bonds in an auction, with the yields falling sharply from the danger threshold of over 7 percent in late November.

It sold 2.5 billion euros (3.1 billion dollars) of bonds that will be due in 2014 at a yield of 5.62 percent and priced at the equivalent amount of 10-year bonds to a yield of 6.98 percent.

However, the euro once dropped to 1.2858 against the U.S. dollar after the bond auction, the lowest level since Sept. 14 last year.

The demand was weaker than expected and the interest rates were still too high, said Francesco Previtera, head of the Milan-based Banca Akros ESN.

Nervousness in the international markets was mainly caused by lack of liquidity as "most of the funds provided to banks by the European Central Bank (ECB) in the past days have not been put into use yet," he noted.

Earlier this month, the central bank unprecedentedly provided three-year loans valued at 489 billion euros for more than 500 banks through the long-term refinance operations, which nurtured hopes that fresh money might flow back into government debt.

However, the cheer for the effort quickly faded as investors doubted the operation's effectiveness to solve the problem.

The eurozone's third largest economy also sold 9 billion euros (about 11.5 dollars) of six-month bonds on Wednesday with the borrowing cost of 3.25 percent, halved from a euro-era high last month.

"The quite successful government bond auctions made on Wednesday and Thursday were an encouraging signal, although we do not think the financial turmoil has ended," Monti said.