Italy borrowing costs drop in bond auction

Italy's borrowing costs dropped in an auction of six-month bonds on Friday that raised 8.5 billion euros ($A10.11 billion) following an European Central Bank pledge to do everything to save the euro.

The rate on the six-month bonds dropped to 2.454 per cent compared with 2.957 per cent at the last similar operation on June 27, the Bank of Italy said.

ECB head Mario Draghi's comments on Thursday that the bank is "ready to do whatever it takes to preserve the euro" appeared to reassure skittish investors, and sparked a welcome turnaround on Italy's stock exchange.

Draghi's comments were aimed to stem rising panic as the eurozone crisis took another turn for the worse, with Spanish borrowing costs at dangerously high levels and bailed-out Greece's rescue program seemingly on the rocks.

The yield on the benchmark 10-year Italian government bonds dropped below the 6.0 warning barrier, and Spain's rate eased back under 7.0 per cent.

With little guarantee that borrowing costs will not rise again, however, Italy's Prime Minister Mario Monti has arranged a working lunch with French President Francois Hollande next week in Paris.

The leaders are pushing for the rapid implementation of European Union reforms agreed in June to support banks and growth.

Italy has found itself back in the line of fire in part because of fears that its southern island of Sicily - dubbed "the Greece of Italy" by the Italian media - may default.

Moody's on Thursday downgraded the credit rating for the Italian region to within one notch of junk status, with a warning of a possible further downgrade in light of the recession which is likely to continue this year.

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