Italy's parliament on Friday gave final approval on Friday to a 48-billion-euro ($68-billion) austerity budget aimed at slashing the deficit by 2014 and reassuring nervous financial markets.
Adoption of the wide-ranging plan, which includes deep cuts to regional subsidies, family tax benefits and top-tier pensions, came just ahead of the hotly awaited release of results from stress tests on 91 European banks.
Italy has been swept by uncertainty on the markets in recent days and the central bank warned that if high long-term borrowing rates persist this would have "considerable costs" for public finances and risks for the economy.
The bank's report added that recent tensions in the 17-nation eurozone had "increased the urgency of proceeding with a consolidation of public finances" in order to "lower risk premiums and diminish long-term borrowing rates."
Financial markets are on edge as a crisis over the ability of heavily-indebted European countries to repay their loans has threatened to spread to Italy and Spain -- the eurozone's third and fourth biggest economies.
"Very high public debt remains the most vulnerable point of the Italian economy, particularly in this climate of high uncertainty," the EU's Economic Affairs Commissioner Olli Rehn told La Repubblica daily in an interview.
"Intense negotiations are underway on what measures to take on Greece and how to avoid contagion," Rehn said, as officials prepared for a crisis summit in Brussels in the coming days to discuss a possible second bailout for Greece.
Talks between the Greek government and private creditors ran into a second day in Rome on Friday after the International Monetary Fund urged banks and insurers to shoulder up to 33 billion euros of the costs of a new rescue.
Italy's parliament has raced to adopt the austerity plan in record time after it was first proposed just two weeks ago with the aim of cutting the deficit to 0.2 percent of Gross Domestic Product by 2014 from 4.6 percent last year.
The plan was approved by 316 votes in favour and 284 against after the main centre-left opposition Democratic Party said it was voting against but would not block its passage and demanded fresh elections after the vote.
The central bank meanwhile raised its growth forecast for this year to 1.0 percent from 0.9 percent but kept its prediction for 2012 at 1.1 percent. The Italian economy grew by 1.3 percent last year.
Italy is the world's eighth-biggest economy but is laden down by a public debt of about 120 percent of GDP, even though its budget deficit has remained relatively moderate compared to deficits elsewhere in Europe.
Analysts have warned that Italy's virtually stagnant economy and tensions within Prime Minister Silvio Berlusconi's ruling coalition are potential risks but have dismissed the prospect of having to resort to a bailout.
Trade unions have already said they are opposed to the latest measures and the largest union, CGIL held a small symbolic rally outside parliament ahead of the vote.
"This budget hurts the most vulnerable" and "Go away Berlusconi! It's time for change!" the roughly 200 demonstrators chanted.
Official data released on Thursday showed the poverty rate in Italy has gone up to 13.8 percent in 2010 from 13.1 percent in 2009.
Emma Marcegaglia, head of the employers' federation Confindustria, also criticised the plan, saying it raised taxes and failed to reduce bureaucracy.
Events in Italy were playing out against a backdrop of disarray in Europe as officials sought to resolve divisions over a new bailout for Greece and lay the ground work for a debt crisis summit that could take place as soon as Monday.
Germany, Finland and the Netherlands argue that private banks should share the pain of aiding Greece even at the cost of allowing it to default.
The European Central Bank and several other eurozone nations object strongly to letting Athens default given the repercussions that could have.
Problems in the eurozone have been causing "a good bit of anxiety in markets," US Federal Reserve Chairman Ben Bernanke said earlier, amid sensitive debt talks in Washington that also have ratings agencies and investors on edge.