Greece struggled Friday to reach an accord with private creditors needed to unlock fresh bailout funding but eurozone market tensions eased ahead of a hotly-anticipated Italian bond auction.
Greece was under intense pressure to strike an agreement on a major writedown of privately-held Greek debt, with negotiators for banks warning that time was "running short" and officials saying a deal could be ready next week.
The ongoing talks "are stalling," analysts at Dutch bank ING warned in a note, adding that if a firm agreement is not in place by March "there will be no second bailout package and a disorderly (Greek) default will take place."
Negotiators said on Thursday that "key areas remain unresolved." Banks are expected to take a write-down of at least 50 percent , which would remove about 100 billion euros ($128 billion) from Greece's 350-billion-euro debt.
Frederic Oudea, the head of French bank Societe Generale, said in an interview with Les Echos newspaper that the Greek debt negotiations would become "a benchmark for bad" and could "weigh on other countries".
Meanwhile, Italy prepared to hold a bond auction to raise up to 4.75 billion euros ($6.11 billion) that was being closely watched by investors to determine whether markets really have had a change of heart on Italian debt.
The sale of medium- and long-term debt was expected to indicate whether Italy's borrowing costs can fall substantially below the 7.0-percent danger threshold that has set off alarm bells in Europe and beyond.
In an auction of short-term debt on Thursday, Italy raised 12 billion euros at rates far lower than in a similar auction last month, indicating greater market confidence as well as high liquidity in the market.
"From high risk to a good investment," business daily Il Sole 24 Ore said of the Italian bond market. The analysts at ING said: "On the back of this environment, we expect a positive outcome for today's auctions."
Italy, with a debt mountain of 1.9 trillion euros, an economy headed into recession and borrowing costs that have reached disturbing levels in recent months, needs to raise a total of some 450 billion euros this year.
Italian Prime Minister Mario Monti has called for greater recognition and recompense for Italy's efforts to cut its public deficit with a total three austerity budgets worth 80 billion euros in the past year alone.
A report in Italian daily Corriere della Sera on Friday said German Chancellor Angela Merkel had suggested to Monti during talks in Berlin this week that Italy should seek a credit from the International Monetary Fund.
The report, which did not cite its sources, said Monti had refused.
The former European competition commissioner is due to host Merkel and French President Nicolas Sarkozy in Rome next week ahead of a summit of European leaders on January 29 that will focus on the debt crisis.
Negotiators in Brussels said this week they had reached an outline deal on a European pact to restore balanced budgets, an announcement that should help alleviate some of the concern swirling around debt and currency markets.
But analysts from Germany's Commerzbank remained cautious, saying in a note that "the relief in the sovereign debt crisis that we have witnessed since early December is not likely to last.
"The risk that Greece may default on its debt is considerable," they said.
Financial markets, however, were upbeat ahead of Italy's auction, with stocks rising 1.02 percent in Frankfurt, 0.71 percent in London and 1.14 percent in Paris in opening trades.
Borrowing costs on eurozone bond markets, which have hit record highs over fears of a collapse of the single currency, also eased sharply.