Italy has slid back into recession following a series of strict budget cuts as the eurozone's third largest economy braces for an even worse contraction this year, official data showed on Wednesday.
The economy shrank by 0.7 percent in the fourth quarter of 2011 following a contraction of 0.2 percent in the third, the Istat data agency said, although gross domestic product (GDP) grew by 0.4 percent overall last year.
A recession is usually defined as two consecutive quarters of contraction.
Italy was last in recession in 2009 with a shrinkage of 5.1 percent and has failed to make a significant recovery since then, with unemployment up and a giant national debt rising to around 1.9 trillion euros ($2.5 trillion).
"The budget cuts are weighing it down ... The conditions for a recovery in consumption are not there since unemployment hit a new record" of 8.9 percent in December, Chiara Corsa, an economist at UniCredit bank, told AFP.
Corsa said high borrowing costs for Italy in recent months have also had "repercussions on financing conditions for banks and businesses."
Fabio Fois from British investment bank Barclays Capital said: "Italians are cutting back a bit more, expecting an 2012 that will be marked by austerity."
The fourth quarter shrinkage was bigger than expected by analysts polled by Dow Jones Newswires, who had been forecasting a 0.4-percent contraction.
Under attack on the financial markets, Italy has adopted several large scale austerity packages since 2010 which have slowed economic activity.
The cuts are aimed at achieving a balanced budget by 2013.
The government is currently forecasting a gross domestic product (GDP) contraction of 0.4 percent this year but the Bank of Italy has said it expects the shrinkage to be between 1.2 percent and 1.5 percent.
The International Monetary Fund estimates a fall of 2.2 percent.
Prime Minister Mario Monti, a former eurocrat and economics professor, took over from Silvio Berlusconi in November as the head of an unelected technocratic government charged with rescuing Italy from financial disaster.
He has promised long-delayed structural reforms to boost growth, even though Deputy Economy Minister Vittorio Grilli earlier this month said the growth benefits from the reforms would only come in the medium term.
This year "will be difficult" despite Monti's success in breaking a "vicious circle" of rising borrowing costs and falling investor confidence, Corsa said.
The growth data comes a day after Italy announced it would not make a bid for the 2020 Olympics in order to save money and as the defence ministry announced sweeping defence cuts including a cut in F-35 fighter jet orders.
Defence Minister Giampaolo Di Paola said the number of armed forces and defence ministry personnel would be reduced by 43,000 to 170,000 over the next decade through hiring cuts and transfers.
He said F-35 orders from the United States would be cut from 131 to 90.
The army will also lose two of its 11 brigades, as well as reduce the number of tanks, armoured personnel carriers, artillery pieces and helicopters. Warships and submarines will be reduced from 24 to 14.
Di Paola said some defence ministry property would be sold off "to contribute to a restructuring of the defence ministry and more generally to a financial recovery in the country."