$40.3 billion package of austerity measures on Sunday, raising taxes and increasing the pension age by Italy PM

Prime Minister Mario Monti unveiled a $40.3 billion package of austerity measures on Sunday, raising taxes and increasing the pension age in a drive to shore up Italy's strained finances and stave off a crisis that threatens to overwhelm the eurozone.

Packed into a single emergency decree which comes into effect before formal parliamentary approval, the measures followed growing pressure for sweeping measures to restore confidence in the eurozone's third-largest economy.

Monti said the package, divided between 20 billion euros of budget measures over 2012-14 and a further 10 billion euros in measures to boost growth, was painful but necessary. "We have had to share the sacrifices, but we have made great efforts to share them fairly," he told a news conference, in which he said he had renounced his own salary as prime minister and economy minister.

Deputy Economy Minister Vittorio Grilli said the package should ensure that Italy met its target of a balanced budget by 2013 despite an expected 0.4-0.5 per cent contraction in the economy next year and zero growth in 2013.

In a mark of the emotional impact of the cuts, Welfare Minister Elsa Fornero broke down in tears as she announced an end to inflation indexing on some pension bands, a move that will mean an effective income cut for many retired people.

The measures come before one of the most crucial weeks since the creation of the single currency more than a decade ago, with European leaders due to meet on Thursday and Friday in Brussels.

Italy, with stagnant growth and a public debt of around 120 per cent of gross domestic product, has been at the centre of Europe's debt crisis since yields on its 10-year bonds shot up to around 7 per cent.

Adoption of the package is seen as vital for re-establishing Italy's shattered credibility with financial markets.

Unions said the cuts will hit poorer workers and pensioners disproportionately hard, but there was little sign of serious political opposition to Monti's plan.

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