Spain's 10-year yields declined 2 basis points today to 6.69 percent following a surge after the bailout. Italian bonds also strengthened after slumping the previous two days.

“The crisis will inevitably roll on to the next domino, and that's Italy,” James Nixon, chief European economist at Societe Generale SA in London, said in a telephone interview. “The southern European economies are effectively in free-fall and market appetite for southern European debt is rapidly drying up. I can't see anything to turn that dynamic around.”

Monti told lawmakers in the national parliament that the EU hasn't time to wait for austerity plans to stabilize borrowing costs and officials must act to support economic growth as the Italian economy slides deeper into recession.

The Italian economy shrank by 0.8 percent in the first quarter compared with 0.7 percent in the previous three months and a 0.3 percent contraction in Spain in the first quarter. Italy's borrowing costs surged at a sale of 6.5 billion euros of one-year Treasury bills yielding 3.972 percent. One-year paper paid 2.34 percent at the previous sale on May 11.

“Above all, Europe needs more growth,” said Monti, who will travel to Berlin today. The single currency area is “in a particularly intense and particularly crucial” situation.

Spiraling borrowing costs and shrinking output are opening divisions among EU leaders who face a series of hurdles in the coming days as bond investors question their ability to hold the euro area together. Italy is due to sell another 3 billion euros of bonds tomorrow while international consultants are due to report on the extent of Spanish banking losses by June 21.

Spain Deficits

The European Commission forecasts that Spain will post deficits of 6.4 percent of gross domestic product this year and 6.3 percent in 2013 even after unveiling 45 billion euros of spending cuts and tax increases. Rajoy's aim is a deficit of 5.3 percent of GDP this year.

Greeks will vote June 17 on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund as a condition of its bailout. New Democracy leader Antonis Samaras, who supports the bailout conditions, said backing Tsipras will see Greece effectively thrown out of the euro.

“The indirect impact of a Greek redenomination on banks throughout the eurozone could be severe, most notably in program countries as well as Spain and Italy,” Fitch Ratings said in a report today. “A robust response from policymakers would be required.”

Bundesbank board member Andreas Dombret this week said the ECB won't buy more government bonds to ease the market tensions while Swedish central bank governor Stefan Ingves today said it's hard to see what else the ECB could do for Spanish lenders.

“We have done our part,” Dombret said in a June 11 interview in London. “Now it's up to the political leaders to deliver on the fiscal and structural policy side.”

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