A technocrat government possibly led by former EU commissioner Mario Monti is being debated. On Thursday, Italy raised 5 billion euros (4.3 billion pounds) from new government bonds. But this was at an interest rate of 6.087% to borrow the money for one year. The senate voted by 156 to 12 in favour of the austerity package. The bill now goes to the lower house, the chamber of deputies, which will meet in special session at the weekend.

Alan Johnston, BBC News, Rome, writes:- "All that Mario Monti has said publicly is that there is a great deal to do and there has to be an end to privilege - a reference, really, to the way the political class here is seen as getting too big a share of the national cake.

The idea that politicians will have a lot of their benefits squeezed will play very well publicly, but Italy's problems go deeper than that. Everyone agrees the economy needs to be reformed, but the big question is how. If there is to be austerity, who should feel the pain most?

In the street, they would tell you it needs to be the rich: the financiers, the bankers, the tax-evaders. On the other side of the debate, there are people who would say the public sector workers have had it too easy for too long - that employers must be allowed to hire and fire people more easily if business is to be given a freer hand."

However, there were also reports that German and French officials were privately looking at ways to make it possible for European nations to leave the eurozone, causing US shares to slump by three per cent last night. The turmoil dramatically increased the risk of a "double dip" recession in Britain, with most economists predicting that the economy will grind to a halt before the end of the year.

David Cameron described the state of the Italian economy as "tragic" and urged European leaders to intervene quickly in the situation to stop the crisis spreading to Spain and France. "If you don't have credibility about your plans to deal with your debts and deal with your deficits, whether you like the markets or not, they won't lend you any money," he said. "That's what we are seeing in countries like Greece, and now tragically Italy, where the price of borrowing money is getting to a totally unsustainable level. It's a lesson for all of us to have sustainable plans to get on top of our debt and our deficits."

Jennifer McKeown, a senior European economist at Capital Economics, said: "It is a panic. Rome is burning. Governments need to stop the fire spreading. Britain can't escape the implications of this crisis." Marc Ostwald, an economic strategist at Monument Securities, added: "This is a form of meltdown. I would imagine the telephones between international finance ministries and central banks are in danger of running so hot they'll melt down themselves."

Alistair Darling, the former chancellor, said: "I despair of the way in which EU leaders are constantly behind events. I do not think enough people realise how serious this crisis is, and how hard it is going to hit us. This is far worse than the banking crisis of 2008."

Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back and prompting German Chancellor Angela Merkel to issue a call to arms.

"That will mean more Europe, not less Europe,'' she told a conference in Berlin. She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stayed more loosely connected - a signal that some members may have to quit the euro if the entire structure is not to crumble.

Merkel Calls for 'Breakthrough to a New Europe'. "It is time for a breakthrough to a new Europe,'' Merkel said. "A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive."

"This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years," one EU diplomat told Reuters. "This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions. "We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part. In doing this exercise, we will be very serious on the criteria that will be used as a benchmark to integrate and share our economic policies."

It came after spending about six hours over two days meeting with its lawyers to discuss legal options. Those options included a Chapter 9 bankruptcy filing and a settlement with creditors on the county's $3.14 billion sewer debt.

Jefferson County has been trying since 2008 to avoid filing bankruptcy over the debt, which resulted from a mix of outdated sewer pipes, the lagging economy, court rulings and public corruption. At the same time, it faces a separate shortfall of as much as $50 million in its operating budget because courts struck down a major local tax as unconstitutional.

Commissioner Jimmie Stephens made the motion to file for bankruptcy. He said the commission and creditors never could complete the tentative agreement they reached in September and remained about $140 million apart. "Despite our best efforts the negotiations had not produced any decision that fairly treats the county and our citizens. And it did not appear that further negotiations would produce that," he said.

The September agreement called for $1 billion in concessions from creditors and sewer rate increases of up to 8.2 percent a year. He said that without more concessions, the rates would have had to be above 8.2 percent. He said filing the largest municipal bankruptcy ever will create an initial shock, but it will be good to start resolving a financial problem that has hindered the county for too long. "Jefferson County has, in effect, been in bankruptcy for three years," he said.

The measure for pain in this latest market drama has been the yield on Italian bonds, which traded above 7 percent for the first time Wednesday, a level viewed as unsustainable by the markets and the level at which Greece, Ireland and Portugal sought help. The warning signs were also flashing when the yield curve inverted, and 2-year yields rose above the 10-year, which was at 7.25 percent.

Italian Prime Minister Silvio Berlusconi said Tuesday that he would resign after the 2012 budget is approved, which sent risk markets rallying. However, the lack of clarity around Berlusconi's exit concerned markets and Italian bonds continued to feel pressure.

"This is getting to be a game changer, will we have a euro one day? The market is forcing that issue much faster than any time in the past. It was one thing when it was about Greece. If you let Italy go off the cliff, you're questioning why do you have a euro in the first place," said Nomura Americas Treasury strategist George Goncalves. "You cannot allow the Italian bond market, the third largest market, the biggest in Europe, to trade like a high-yield market," he said of the $2.2 trillion Italian debt market.

"The authorities should understand the gravity of the situation. If they don't, then they are admitting defeat and the euro will be called into question," said Goncalves.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged more than 30 percent to close above 36.

Stocks slumped further after the Greek President called for a meeting of political leaders on Thursday after the nation's two main political parties failed to agree on who will lead the country's interim government. Earlier, Reuters reported that Greek party leaders had agreed on house speaker Filippos Petsalnikos to head Greece's new coalition government, but the decision may have been withdrawn.

In addition, EU officials said they have no plans in place for a financial rescue of Italy, and adding the euro zone was not even considering extending a precautionary credit line to Rome. "The problem is, we've reached the domino phase, so it's not about Greece anymore - it's Italy and if Italy has a problem, then France has a problem too," said Brian Battle, vice president of trading at Performance Trust Capital Partners. "The hope that there would be a solution is now non-existent."

Italian borrowing costs reached a breaking point, closed over 7 percent, a level that previously drove other euro zone nations such as Greece and Portugal out of credit markets and forced those countries to seek bailouts from external assistance from the EU and IMF. However, most strategists worry that Italy is too large to bail out.

The International Atomic Energy Agency found that Iran is developing a nuclear test facility, nuclear detonators and computer modelling for a nuclear warhead that would fit on an existing missile. Sources say the understanding at the top of the British Government is that Israel will attempt to strike against the nuclear sites 'sooner rather than later' - with logistical support from the US.

A senior Foreign Office figure has revealed that ministers have been told to expect Israeli military action, adding: 'We're expecting something as early as Christmas, or very early in the new year.' Officials believe President Barack Obama would have to support the Israelis or risk losing vital Jewish-American support in the next presidential election.

In recent weeks, Ministry of Defence sources confirmed that contingency plans have been drawn up in the event that the UK decided to support military action. But the source ruled out direct British support, adding: 'Of course we are not in favour of Iran developing a bomb - but do we think they'd use it: no. The bigger concern is it will be impossible to stop Saudi Arabia and Turkey from developing their own weapons.'

Earlier, outgoing PM George Papandreou confirmed his socialist party and conservatives would join the coalition - but he did not name a successor. He said the new government would approve the terms of an EU bailout. Without the bailout, Greece risks bankruptcy and an exit from the eurozone.

Under the terms of the deal, Greece must enact further austerity measures in return for a bailout of 130 billion euros (111 billion pounds; $178 billion) and a write-off of half the Greek debt held by private lenders. The BBC's Mark Lowen in Athens says there is now a perilous power vacuum in Greece, which is running out of time to resolve its problems.

EU economic affairs commissioner Olli Rehn said he wanted the heads of Greece's two main parties to commit in writing to the terms of the bailouts before Athens could receive the next instalment. But Mr Samaras balked at the idea, saying he regarded the rescue deal as "inevitable" but saw no need for a written pledge. Greece needs the next tranche from the first bailout, worth 8 billion euros (6.8 billion pounds; $11 billion), to avoid running out of money within weeks.

One can only guess what is happening in the great global centres of power, but it would not surprise me if US President Barack Obama and China's Hu Jintao start to intervene very soon, in unison and with massive diplomatic force. One can imagine joint telephone calls to Chancellor Angela Merkel more or less ordering her country to face up to the implications of the monetary union that Germany itself created and ran (badly).

Having followed the German political scene closely for the last five months, it is clear to me that almost the entire German political establishment is out of its depth, ideological, sometimes smug, apt to view the EMU debt-crisis as a Calvinist morality tale, and lacking in deep understanding of what it has got itself into. One can understand German worries about money printing - and especially the loss of fiscal sovereignty and democratic control - but matters have already moved on. It is too late for that.

As for the EU authorities with their mad contractionary fiscal and monetary policies in an accelerating slump, they seem to have achieved little by toppling two elected governments in one week. In Italy they have already made matters worse. I doubt that much will change with "technocratic governments" in either Greece and Italy, yet immense damage has been done to democratic accountability. THE EU PROJECT HAS BECOME BOTH DANGEROUS AND INSANE.

A breakdown of investors in the European Financial Stability Facility's (EFSF) bond-raising on Monday showed that Asia dramatically reduced its involvement compared with earlier this year. European institutions, largely banks, picked up the shortfall.

If the EFSF can not raise money freely on the international markets, it will leave the European Central Bank (ECB) as the only viable backstop to the crisis. However, Germany is refusing to allow the central bank to operate in such a capacity.

The EFSF raised a 3 billion euros 10-year bond on Monday to provide Ireland part of its rescue package, but only just scratched together the funds.

Wednesday's breakdown showed that Asia cut its share of the funding from 46 per cent in the last issue in June to just 23 per cent. Europe and the UK responded by lifting their joint subscription from 46 per cent in June to 69 per cent. The weak support for the EFSF poses questions about whether it can even raise the initial 440 billion euros, let alone "leverage" the funds into a 1 trillion euros "bazooka".

Be careful what you wish for. That would seem to be the lesson from the events of the last several days in Rome. Both European Union leaders and markets had been exerting intense pressure on Italian Prime Minister Silvio Berlusconi to resign in recent weeks. Yet now that he has indicated a willingness to step aside, the uncertainty seems greater than ever.

The most disturbing indication of the growing panic over Italy's economic future is the soaring interest rates for Italian sovereign bonds. After hitting record highs earlier in the week, they briefly dropped on the news of Berlusconi's imminent departure. But on Wednesday, yields on Italian 10-year bonds shot up again to 7.4 percent, eclipsing the Tuesday highs of 6.74 percent and leaping the 7 percent hurdle into territory that most analysts view as unsustainable.

It is a worrisome development. "All of us in Europe are in a very difficult situation," German Chancellor Angela Merkel said in a Wednesday interview with the German news agency DPA. "All the weak points are rapidly being exposed." She also said that "Italy must redouble its consolidation efforts."

Italy is cause for particular concern because the country is the common currency area's third largest economy. Bailing it out on the model of Portugal or Greece is likely not an option. Whereas EU leaders agreed to assist Greece to the tune of 130 billion euros ($177 billion) at a summit in October - meant to sustain it for several years - Italy will need to refinance fully 300 billion euros in debt in just the next 12 months. Its total debts stand at 1.9 trillion euros, or 120 percent of the country's gross domestic product.

In the long term, it would appear that Chancellor Merkel has a plan. Speaking at a conference in Berlin, she said that things had become "unpleasant" and that it was time to focus on making changes to the treaties underlying the EU and the common currency. "IT IS TIME FOR A BREAKTHROUGH TO A NEW EUROPE," she said. "A community that says, regardless of what happens to the rest of the world, we can never again change the ground rules - that community simply cannot survive." And in the short term? That, it would seem, is anybody's guess. "We are," said Merkel's spokesman Steffen Seibert on Wednesday "watching developments in Italy with great interest."

"The recent events in the euro zone have caused the risk on/risk off paradigm to strengthen even further. Over the last week it has almost become a caricature of itself: we saw extreme euphoria on the back of a purported bailout package followed days later by intense despair induced by the prospect of a Greek referendum," said David Bloom, Global Head of FX Strategy at HSBC in a research note.

"These dramatic shifts in sentiment led to rollercoaster moves in risk asset prices," Bloom said. With cross-asset correlations at an all-time high according to HSBC, Bloom says market participants are comparing the current Greek crisis to Lehman Brothers and has this warning for investors: "Market stresses are currently far worse than after Lehman and the event which people are worried about has not even happened yet!"

"Despite this, perceptions about the possibility of the event are already driving markets to an unheard of level," said Bloom. When the event, whatever it is, does actually happen it will be very bad news for the global economy according to Bloom. "Were the event to actually occur it would lead to the great depression Mark II," said Bloom.

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions. "We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.

French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe - the euro zone moving ahead more rapidly than all 27 countries in the EU - was the only model for the future. The discussions among senior policymakers in Paris, Berlin and Brussels raised the possibility of one or more countries leaving the euro zone while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy.

Britain, which is adamantly outside the euro zone, is also opposed to any moves that would create a two-speed Europe, or institutionalize a process even if it is already under way. "We must move together. The greatest danger we face is division," Britain's deputy prime minister, Nick Clegg, said during a visit to Brussels on Wednesday.

"That is arrogant," Paul said of Obama frequently using the executive order function as of late. "It is flaunting the Constitution and the whole principle of how we're supposed to operate. The idea they can just do this and take over the legislative function and brag about it - and Congress does nothing and the courts do nothing about it, it's very, very bad. He's dictatorial, is what he is," Representative Paul said before the end of the interview.

The quake's epicentre was near Van province, where an 7.2 earthquake last month killed more than 600 people. Ambulances rushed to the scene of the collapsed hotel in Van city centre, the private NTV television station reported. Television pictures showed residents and rescuers trying to lift debris to free people believed to be trapped under the hotel in the provincial capital.