* Bank of Italy says growth may be under 1 pct in 2011, 2012
* Central bank urges structural measures in austerity plan
* Market tensions still high, bond auction disappointing
(Rewrites, adds quotes, detail, background)
By Catherine Hornby and James Mackenzie
ROME, Aug 30 Italy's central bank said a weak
economy threatens government efforts to contain the country's
debt mountain, while rising bond yields after a lukewarm auction
on Tuesday put it back in the front line of the euro crisis.
Ignazio Visco, deputy director-general of the central bank,
said growth was likely to be under one percent in 2011 and even
weaker in 2012 and warned that market tensions remained high.
"We risk a phase of stagnation, which would slow the
decrease in the debt burden," Visco told a Senate committee.
His remarks came as the European Central Bank returned to
the market to buy Italian bonds after an auction of long term
BTPs drew a poor response that sent the spread over 10 year
German bonds above the symbolically important 300 basis points.
Visco said changes to a 45.5 billion euro ($66 billion)
austerity package aimed at balancing the budget by 2013 must
include measures to boost growth in the euro zone's third
"Balancing the budget has to be combined with economic
policy aimed at reviving prospects for growth in our economy."
Prime Minister Silvio Berlusconi's government approved the
austerity plan earlier this month after weeks of market
turbulence hammered Italy's government bonds and dragged it
close to a Greek-style financial crisis.
The plan was agreed after heavy pressure from the European
Central Bank, but the government has since dropped parts of the
plan including a proposed levy on high earners and also promised
to ease funding cuts to local governments.
Berlusconi, who risked a split with his Northern League
coalition partners over the mix of tax hikes and spending cuts,
said he was pleased with amendments agreed on Monday, which left
the overall size of the package unchanged.
However analysts said the uncertainty surrounding the
package meant that markets would continue to remain suspicious
of Rome's ability to control public finances.
"The continuous changing of the measures is not a good
signal because it shows there is division and indecision in the
government and it transmits uncertainty to the markets," said
Citigroup economist Giada Giani.
Visco said there were increasing signs of weakness in the
world economy and that growth in the euro area in the second
half of the year was likely to be less than half the level seen
in the first half.
"Considering these factors, in an environment which remains
extremely uncertain, growth in GDP could be below a percentage
point in the current year and even weaker in 2012," he said.
"This would inevitably have an effect on public accounts
making the aim of balancing the budget more difficult and
slowing down the reversal of the weight of public debt."
In July, the Bank of Italy had forecast growth of 1 percent
in 2011 and 1.1 percent in 2012. On Tuesday, the head of
statistics agency ISTAT said 2011 growth was unlikely to be much
more than 0.7 percent.
Italy's public debt burden of more than 120 percent of gross
domestic product is one of the heaviest in the world and its
chronically sluggish economy has been one of the world's slowest
growing over the past decade.
Visco said more measures were needed to boost
competitiveness and create a more favourable environment for
business but his remarks underlined how hard it will be to
control the deficit while encouraging growth.
"Restoring public finances, aimed at balancing the budget by
2013, will slow growth but there are no alternatives," Visco
told the Senate committee. "Any other scenario would lead to
more traumatic results for our country."
(Editing by Ruth Pitchford)
($1 = 0.688 Euros)