* Italian Senate backs austerity package, lower house votes Saturday
* Papademos new Greek PM, Venizelos stays as finance minister
* Obama calls Merkel, Sarkozy and Italian president
* New Italian government may be in place before markets open Monday
* EFSF head and ECB’s Nowotny concerned about rescue fund
By Barry Moody and George Georgiopoulos
ROME/ATHENS, Nov 11 (Reuters) - Italy’s parliament began rushing through austerity measures demanded by the European Union to avert a euro zone meltdown, after U.S. President Barack Obama ratcheted up pressure for more dramatic action from the currency bloc.
Italy’s Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.
In Athens, former European Central Bank policymaker Lucas Papademos was sworn in as Greek prime minister after days of political wrangling, tasked with meeting the terms of a bailout plan to avert bankruptcy.
Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy late on Thursday and also called Italian President Giorgio Napolitano.
A German government official said there had been an “exchange of opinions” between Merkel and Obama, while Treasury Secretary Timothy Geithner demanded fast action from Europe.
“The crisis in Europe remains the central challenge to global growth. It is crucial that Europe move quickly to put in place a strong plan to restore financial stability,” Geithner said in a statement following a meeting with finance ministers from the Asia Pacific Economic Cooperation countries.
After months of dither and delay, Rome appears to have got the message as bond markets pushed it to the brink of needing a bailout that the euro zone cannot afford to give.
If the votes pass smoothly, Napolitano will accept Berlusconi’s resignation over the weekend and ask veteran former European commissioner Mario Monti, a technocrat like Papademos, to form a government.
Berlusconi has promised to resign after the financial stability law is passed by both houses of parliament.
He had insisted on early elections but then softened his stance. Markets were calmed by the prospect that there would be an interim government, rather than a three-month vacuum before elections are held.
“The most important element to overcome this crisis is a very trusted and able new Italian government that can really fulfil the structural changes that are needed,” ECB policymaker Ewald Nowotny told Reuters in Beijing.
The euro firmed but investors doubted whether it would climb far, given that even a technocrat Italian government might struggle to make progress on long-promised, never-delivered fiscal reforms.
Italian 10-year borrowing costs fell sharply to 6.6 percent, having hit an unsustainable 7.5 percent earlier in the week.
“We can have maybe two or three days of calm — in inverted commas — but nothing has really changed underneath,” one bond trader said.
Spain, the euro zone’s fourth largest economy, which holds elections in nine days’ time, stopped growing in the third quarter, raising doubts about its ability to meet deficit reduction targets.
With European leaders dithering over how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully by becoming a full lender of last resort, as the Federal Reserve and Bank of England are.
“There is real turbulence in the markets, real question marks over whether countries can deal with their debts and a big question mark over the future of the euro zone,” British Prime Minister David Cameron said.
Three senior ECB policymakers on Thursday rebuffed arm-twisting from investors and world leaders to intervene massively on bond markets to shield Italy and Spain from financial contagion.
German Economy Minister Philipp Roesler said on Friday the ECB did not have “unlimited firepower”. He said if it opened its floodgates fully, they could never be closed again.
Berlin strongly opposes the ECB taking on a broader crisis-fighting role, arguing this would compromise the independence of the bank.
The euro zone’s plan for a more powerful rescue fund may also be running into trouble.
Klaus Regling, the head of the 440 billion euro European Financial Stability Facility, was reported by the Financial Times as saying the recent market turmoil had made it more difficult to scale it up to 1 trillion euros, as proposed by euro zone leaders, who promise a definitive plan by December.
Luring bond investors by offering insurance on losses, the centrepiece of a plan agreed in Brussels on Oct. 26, would now probably use up more of the fund’s resources, Regling said.
“The political turmoil that we saw in the last 10 days probably reduces the potential for leverage. It was always ambitious to have that number, but I’m not ruling it out,” the FT quoted him as saying.
Nowotny also expressed concern.
“It is very important that these plans — actually these decisions — now really get operational, and I’m a bit concerned that this takes a long time, perhaps too long,” he said.
In Athens, Papademos, a former vice president of the ECB, faces serious challenges at the helm of a new unity government forged after a chaotic power struggle between Greece’s two main political forces.
He has about 100 days to start fulfilling the terms of a 130 billion euro bailout plan to keep Greece solvent while placating warring political factions.
Socialist party big-hitter Evangelos Venizelos will remain finance minister in a new cabinet that includes many of the same politicians who led the nation into crisis.
Automotive giant Daimler spoke out against keeping Greece in the euro zone at all costs and said the euro would survive even if it were forced out.
“I wouldn’t consider one link splitting off from the rest as a ‘break-up’ of the euro zone,” Chief Executive Dieter Zetsche told Reuters in an interview.