* Confidence falls to lowest in index history
* Confidence series began in Jan 1996
* Consumers more pessimistic about savings, buying potential
By Steve Scherer
ROME, Dec 23 (Reuters) - Italian consumer morale plummeted to its lowest in 16 years in December after Prime Minister Mario Monti introduced a 33-billion-euro austerity package that included tax hikes and pension cuts, data showed on Friday.
National statistics bureau ISTAT's headline consumer confidence index fell more than expected to 91.6 in December, the lowest since the data series began in 1996, after unexpectedly rising to a revised 96.1 in November.
The data was below the median forecast of 95.0 in a Reuters survey of 11 analysts. Forecasts spanned from 93.5 to 96.5. The survey was conducted between Dec 1 and Dec 16, mostly after the Cabinet's Dec 4 passage of the austerity measures.
On Thursday, the Senate cast the final vote to approve the sweeping series of tax increases, pension reforms and spending cuts.
Among the measures that hit consumers immediately were petrol tax increases and the knowledge on the part of some pensioners that their monthly payments be adjusted for inflation. (To see a Factbox with details of austerity measures, click )
"The budget restrictions will reduce people's disposable income, their capacity to accumulate savings, and new taxes have pushed up inflation," said Paolo Mameli, an economist at Intesa Sanpaolo in Milan.
A previously introduced VAT increase and the new petrol levies are pushing consumer prices higher, Mameli said. Intesa forecasts consumer spending will decline by almost a full percentage point next year.
"It's undeniable that consumer sentiment is going to get worse before it gets better," he said.
The decline in sentiment comes as Italy heads into what economists say will be a prolonged recession. Gross domestic product sank 0.2 percent in the third quarter, as did consumer spending, and isn't seen rebounding before the second half of next year, economists say.
Italian employers' lobby Confindustria predicted earlier this month that the economy will shrink by 1.6 percent next year, four times the 0.4 percent drop forecast by the government.
Monti took office five weeks ago to restore investor confidence in Italy's ability to tackle its high debt and address its economic woes.
While bond yields have come down, with the 10-year issue steadily below 7 percent, the austerity package has failed to bring them back to more sustainable levels of about 5 percent. On Friday, the 10-year yield again hovered just below 7 percent.
To restore consumer confidence, European authorities must take more decisive action to resolve the financial crisis, and Italy must boost its potential growth rate, Mameli said.
On Thursday, Monti said he would push euro zone authorities to put more focus on growth now that Italy had put its own house in order, and he said his government would begin work on spurring activity after a decade of near-zero growth.
The severity of Monti's austerity package has taken a toll on his popularity, which fell to 46 percent from 61 percent the previous week, according to a poll published in Corriere della Sera on Sunday.
Consumer spending has long been an Achilles heel of the Italian economy. Friday's report showed that consumers were more downbeat on Italy's current and future economic situation, and had grown increasingly pessimistic about their ability to save money and buy durable goods.
A sub-index measuring confidence future savings fell to -85 from -72 in November, while a sub-index measuring the ability to buy durable goods falling to -99 from -87.
Another sub-index measuring their outlook on Italy's economy fell to -55 from -46, and another showed that their view of the current economic situation fell to -139 from -130.
Analysts say ISTAT's consumer confidence index shows little immediate correlation with spending patterns, though it does reflect longer term trends.
Retail sales in October -- the most recent data available -- fell an unadjusted 1.5 percent on the year, the sixth decline in as many months, indicating a marked contraction in real or inflation-adjusted terms. Inflation was 3.4 percent in October.