The Bank of Italy forecast Tuesday an economic contraction of between 1.2 and 1.5 percent this year depending on borrowing costs, a much sharper decline than the government's estimate of 0.4 percent.
"The uncertainty that surrounds the medium-term perspectives of the Italian economy ... are extraordinarily high and are directly linked to the evolution of the eurozone debt crisis," the central bank said in its economic bulletin.
The bank advanced two scenarios, each based on interest Italy must offer to borrow on sovereign bond markets.
The first scenario was calculated with a rate of about 7.0 percent currently demanded by investors for 10-year Italian debt and widely considered to be unsustainable.
Under these circumstances, the bank said, the Italian economy would contract by 1.5 percent in 2012 and would remain stalled in 2013.
In a second scenario, under which borrowing prices fell by 2.0 percentage points from current levels, the economy would contract by a 1.2 percent in 2012 before rebounding by 0.8 percent next year.
Italy, the eurozone's third largest economy, saw economic activity contract by 0.2 percent in the third quarter of 2011, according to official data.
The central bank expected it to have shrunk by an additional 0.5 percent in the last three months of the year, which would give an annual growth rate of 0.4 percent.
Italy's debt pile of more than 1.9 trillion dollars ($2.4 billion), equivalent to about 120 percent of gross domestic product, has policymakers and investors on edge.
It must borrow around 450 billion euros this year, in large part to honour payments related to that debt.
Meanwhile, the central bank noted that a pick-up in employment that began in late 2010 "stopped in the final months of last year."
It said that "the priority is now the creation of conditions to relaunch the Italian economy" following several austerity plans designed to reduce the public deficit and debt, the last of which was adopted in late December.
The government of Prime Minister Mario Monti is expected to approve Friday a programme designed to increase economic competition and reform labour laws.
Finally, the 2011 public deficit should be close to Rome's target of 3.8 percent, the central bank said.
That nonetheless still exceeds the eurozone target of no more than 3.0 percent.