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G20 leaders are working on a final plan to calm fears of a Greek default and any spread of the crisis to Italy or Spain

Italy, under fierce pressure from financial markets, has agreed to be put under surveillance by the International Monetary Fund (IMF) and the EU as part of a plan to restore market trust in the eurozone's third-largest economy, senior EU sources have said.

"Italy holds the key to the eurozone debt crisis. Developments in Italy are a crucial test for the credibility of the anti-crisis framework set up by the EU"

- Luigi Speranza, BNP Paribas

The agreement was reached after late-night talks on Thursday with eurozone leaders on the sidelines of a G20 summit in Cannes, France.

Silvio Berlusconi, the Italian prime minister, agreed to have the IMF check every three months the way pension and labour market reforms are implemented and privatisations are carried out, the sources said.

"We need to make sure there is credibility with Italy's targets - that it is going to meet them," one EU source told the Reuters news agency on condition of anonymity.

"We decided to have the IMF involved on the monitoring, using their own methodology, and the Italians say they can live with that.

"Italy has no problem with surveillance at all, even with the IMF being involved," the source said on Friday, adding the EU Commission and IMF would each report on how Italy was meeting its targets.

Concern is growing that Italy, the euro area's third-largest economy and biggest government bond market, could go the way of debt-crippled Greece and require a bailout without rapid action.

Berlusconi has repeatedly promised to make deep reforms, balance the budget in 2013 and trim the public debt, but there are doubts about his commitment.

The Italian move came after Greece stepped back from a proposed referendum that could have triggered its exit from the euro bloc and agreed to seek national consensus in support of a $180bn new bailout plan.

'Singled out'

The leaders of France, Germany, Italy, Spain, the European Central Bank, the IMF and EU institutions also discussed with US President Barack Obama ways of increasing the IMF's war chest to help prevent the debt crisis spreading to other countries and possibly plunging the world economy back into recession.

A G20 source said no figures were agreed, but the boost to IMF resources, mostly from large emerging countries such as China, could be in the range of $300bn to $350bn.

EU officials said three options were under consideration, including the possibility of combining the eurozone countries'
rights to borrow from the IMF to build a fund to support nations considered vulnerable, such as Italy and Spain.

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The concession by Berlusconi was an attempt to shore up his country's perilous position on bond markets, where its borrowing costs soared well above six per cent this week, raising doubts about its long-term ability to cope with a debt pile of 120 per cent of gross domestic product.

An official Italian source denied that Italy was being singled out for special surveillance and said the whole eurozone would be under closer monitoring.

However, he confirmed that Rome was willing to request IMF advice on implementing the commitments it gave EU leaders on specific reforms on October 27

G20 leaders, who conclude two days of talks on Friday, are hoping they can convince markets the risk of further eurozone contagion can be stemmed.

The summit meeting has been overshadowed by the eurozone's battle to calm the situation as Greece threw a rescue deal into question and seemed on the brink of quitting the single currency.

Greece's future in the eurozone may hinge on a vote of confidence in George Papandreou's government on Friday night.

If the prime minister wins, government sources say he has pledged to step aside and make way for an interim unity government that would enact the EU/IMF bailout plan, receive a vital aid instalment and pave the way for early elections next year.

But defeat for the government could plunge Greece into deeper political turmoil, leading to a hard default and possible exit from the 17-nation single currency area.

Al Jazeera's Jackie Rowland, reporting from Cannes, said leaders at the G20 meeting had been "riding a kind of Greek roller-coaster over the last 48 hours or so".

"[Obama] made it clear that this is not a crisis that just affects European leaders but has an impact on the whole world," our correspondent said.

"We only have to look at the kind of volatility recently that there has been on the euro-dollar exchange rate to see why people like President Obama are telling the European leaders that they need clarity and detail about how this rescue plan is going to be implemented."

Source: Al Jazeera and agencies