Italy's prime minister has warned that despite his country's borrowing costs falling, his government still has more to do before it has convinced financial markets that it will be able to manage its heavy debts.

Interest rates paid out on Italian bonds dropped for the second straight day on Thursday, and Mario Monti, the Italian prime minister, said that his government of technocrats was preparing a new package of economic measures to help ease the crisis.

The package will include policies aimed at boosting competition and liberalising the labour markets.

"We absolutely don't consider the market turbulence to be over," Monti said at a news conference after the Italian treasury tapped investors for around $9.2bn.

Monti noted that bond yields were dropping even though the European Central Bank had all but stopped its purchases of debt in the markets.

During Thursday's batch of bond auctions, $3.4bn in 10-year bonds were sold at an average yield of 6.98 per cent, down from the record 7.56 per cent last month.


Political analyst, Giovanni Orsina on the Italian economy

Higher yields indicate the market considers there to be a higher risk of the country defaulting on some of its debt.

The seven per cent level is widely recognised as being unsustainable for an economy in the long run.

Greece, Ireland and Portgual all sought financial bailouts after their 10-year bond rates rose above seven per cent. In secondary markets, Italy's bond rates continue to hover around that level.

The eurozone is struggling to deal with a crisis over persistently high levels of government debt in several of the 17 countries that use the single currency.

Italy's debt burden currently stands at $2.5 trillion, with $431bn due to be refinanced next year.

Monti said that lower bond yields could afford the government "space" to try and mitigate some of the harsh budget cuts the government has been forced to make, including tax increases and reforms to the Italian pension system.

His government received parliamentary approval last week to implement more spending cuts and tax increases.

He said that the government would be working a new package of measures, to be presented to the EU on January 23, that would aim to increase competitiveness and flexibility in Italian labour markets and combat property tax fraud.

He particularly mentioned provided youth with employment as a priority.

Source: Agencies