Italy was on the verge of rushing through radical budget cuts on Thursday to prevent its economy, the third-biggest in the eurozone, from being dragged down by the deepening debt crisis.
The Senate, or upper house of parliament, was set to approve a four-year crash austerity plan which business daily Il Sole 24 Ore said had been raised to 45 billion euros ($64 billion) in recent days as market pressure mounted.
Il Sole 24 Ore said that "the nightmare of one of Europe's founding states defaulting... has set off a strong and targeted reaction" from Italy's parliament, which is approving the austerity budget in record time.
The lower house was expected to give its final approval on Friday.
Tension on financial markets mounted after Moody's ratings agency warned it was putting the United States on downgrade watch because of its debt troubles, and Fitch said it was downgrading Greece by three notches.
That was the second ratings blow to a struggling eurozone country within 24 hours, after a downgrade for Ireland.
The IMF meanwhile said Greece would need another 104 billion euros (148 billion dollars) in aid with almost a third of the money coming from private creditors -- an issue that has caused a deep rift between European leaders.
European stock markets fell in opening trading, with London's FTSE 100 index of leading companies down 0.84 percent at 5,856.42 points.The Milan stock exchange however was up 0.14 percent at 18,868.95 points.
But Italian newspapers reported tensions between Prime Minister Silvio Berlusconi and Economy Minister Giulio Tremonti over the austerity plan and the opposition has demanded elections after the budget cuts are approved.
Milan economics professor Guido Tabellini said the rise in Italy's cost of borrowing rates on financial markets in recent days could spell danger.
"Another couple of weeks like this and Italy is out of the market," he said.
European leaders are facing demands for rapid action to fight a spreading eurozone debt crisis, and confusion over policy, which has wreaked havoc on the markets but diplomats say there are still too many divisions over a second rescue package for Greece.
The International Monetary Fund on Wednesday warned the Greek government has little margin of error to avoid defaulting on its 330 billion euros of debt.
"Capital account pressures in Greece remain acute, and Greece continues to face extremely high spreads, with large rollover requirements generating financing needs well beyond normal Fund limits," the IMF said.
It called on the European Union and private creditors to stump up the cash.
It also forecast Greece would suffer a deeper 2011 recession than previously thought, with the economy contracting 3.9 percent, instead of 3.0 percent.
Market sentiment has sharply turned against the country, the IMF observed, pushing back its estimate for the eurozone country's return to the debt markets to the second half of 2014. The prior estimate was for early 2012.
The possible involvement of banks, insurers and pension funds -- opposed by the European Central Bank -- is a factor behind turmoil on financial markets, and has spurred recent selloffs of the debt of Italy and Spain.
The future head of the European Central Bank, Italian central bank governor Mario Draghi, issued an extraordinary warning on Wednesday that the solvency of eurozone countries should no longer be taken for granted.
"The solvency of sovereign states is no longer to be taken for granted but has to be earned in the field with high and sustainable growth, which is only possible with public accounts in order," Draghi said.
"The credibility credit given by stronger eurozone countries has expired. We have to grow without relying on it. Those structural reforms we have been calling for for years are now even more essential," he added.