UPDATE 3-Italians, Greeks sceptical over euro zone rescue plan
* Doubts in both Athens and Rome
* Scepticism that Berlusconi can deliver
* Italian unions consider strikes
ROME, Oct 27 (Reuters) - A deal struck by euro zone leaders on Thursday to contain the region's dangerous debt crisis was greeted sceptically in the two countries most in the firing line, Greece and Italy, with some saying politicians were dreaming.
Italian Prime Minister Silvio Berlusconi submitted an ambitious set of reforms intended to boost growth and cut debt as part of the deal, but analysts questioned the ability of his fractious coalition to implement the plan.
In Greece, opposition politicians and citizens, fearing further painful belt-tightening and years of recession, showed little enthusiasm for a plan for banks and insurers to accept a 50 percent loss on their Greek government bonds.
Berlusconi's pledges include raising the retirement age and making it easier for firms to lay off staff, but few expect a scandal-ridden government with a poor track record of pushing through reforms to be able to do so while battling for survival.
"It's hard to believe that yesterday's intentions can really be transformed into the biggest plan of market reforms Italy has ever put on paper," Antonio Polito wrote in the Corriere della Sera daily, pointing to coalition tensions.
An editorial in the left-leaning La Repubblica daily described the plan as a "book of dreams".
In a sign of the challenges Berlusconi faces, Italy's biggest trade union CGIL responded by pledging to fight the reform plans and called on smaller unions to unite against "targeted attacks" on Italian workers.
Even the smaller and more moderate unions CISL and UIL said they would participate in strikes if Italy's strict job protection rules were at stake.
"Touching redundancies seems like a provocation at a time when the country needs cohesion," said CISL's Raffaele Bonanni.
Berlusconi defended the labour market reform on Italian television later on Thursday, saying it was designed to create a more "efficient and modern" job market that is more open to women and youth.
One of the few voices outside his coalition offering support was the head of Italy's business lobby, Emma Marcegaglia, who welcomed plans for a more flexible labour market and called the reforms a "step in the right direction".
Berlusconi submitted the hastily constructed package of reforms as a "letter of intent" to the EU summit, promising a much-delayed economic development plan by Nov. 15 and other measures to increase growth and balance the budget by 2013.
They formed part of a euro zone deal aimed at drawing a line under spiralling debt problems that have threatened to unravel the European single currency project.
After dodging the worst of the financial crisis in recent years, Italy has moved to the centre of the debt crunch this year as its bond yields soared to near unsustainable levels. Only intervention by the European Central Bank has prevented them from rising out of control.
Investors have fretted about Italy's chronically sluggish growth and the sustainability of its 1.9 trillion euro debt, which at 120 percent of GDP is second only to Greece's in the euro zone.
Berlusconi's fast-lengthening list of problems -- including sex scandals, legal troubles, a public spat with his economy minister and increasingly mutinous allies -- has further undermined confidence among investors.
Berlusconi's Northern League ally, on which he relies on for a parliamentary majority, has refused to budge on some parts of pension reform and has openly questioned whether the government can see out its term ending in 2013. Analysts say early elections are likely in spring next year.
Still, some analysts said Berlusconi's plans went beyond expectations and European stock markets surged to a 12-week high on relief following the deal by European leaders.
The spread between 10-year Italian and German government bonds narrowed to less than 370 basis points on Thursday after hovering close to 400 last week.
"It's at least going in the right direction and going faster than we thought," said Gilles Moec, economist at Deutsche Bank. "A lot will depend on the actual implementation and the timetable."
Analysts welcomed measures on potential job cuts in the public sector and moves to make it easier for companies to lay off people in times of economic difficulty, though they met less support on Rome's streets.
"Making it easier to fire employees doesn't help people at all. They should target large assets, those who have more need to pay more in this moment of crisis," said one Rome resident, who did not wish to be named.
Unicredit analyst Chiara Corsa said the move to facilitate redundancies should have been coupled with a broadening of the unemployment benefit system.
"In addition, more incisive action on the pension system, with more stringent requirements for the access to seniority pensions, or even their abolition as originally requested by the ECB, would have been desirable," she added.
In Greece, citizens hit by several rounds of austerity, including hefty pay and pension cuts and tax rises, responded with similar criticism to the EU deal.
Prime Minister George Papandreou said the agreement meant the country's debt burden would now be sustainable, but people on the streets saw little reason to celebrate.
"I don't feel saved," said teacher Pantelis Abeloyannis, 47, a father of three who is struggling to make ends meet and pay his mortgage following heavy pay cuts.
"The banks are not paying for us today. They are just returning a part of the profit they have made from us all these years."