Italy's 2006 budget deficit is heading towards at least 4.1 per cent of gross domestic product but could rise to 4.6 per cent or more.
The Italian treasury's new forecast, released after its due diligence of public finances inherited from Silvio Berlusconi's previous administration, compares with a 3.8 per cent target set by Mr Berlusconi and agreed with Italy's European Union partners.
In view of the latest forecasts extra 2006 deficit cutting measures are "inevitable," economy minister Tommaso Padoa-Schioppa, making this commitment for the first time since the government took office last month.
He did not quantify the size or the exact timing of the emergency deficit-cutting measures the government plans.
The due diligence committee, containing members from the Economy Ministry, the Bank of Italy and national statistics bureau ISTAT, underlined "the grave state of public accounts . . . which may still not have fully emerged".
The committee said that its deficit forecast of 4.1 per cent was subject to "numerous risks" which could worsen the final result by "at least 0.5 per cent of GDP".
These risks all stemmed from doubts about the quality and the implementation of measures contained in the 2006 budget adopted by the previous government, the Treasury said.
When it presented its Stability Programme to the European Commission last year, Italy pledged to use structural measures to cut the deficit by 0.8 per cent of GDP in 2006 and by the same amount in 2007.
It also committed to ensuring that the 2007 deficit would be clearly below 3 per cent of GDP and that the debt-to-GDP ratio would fall. Last year's deficit rose to 4.1 per cent of GDP from 3.4 per cent, to hit its highest level since 1996.
The deficit has exceeded the European Union's 3 per cent of GDP ceiling for the last three years. Italy's massive national debt - the world's third largest in absolute terms - rose in 2005 to 106.4 per cent of GDP, the first increase since 1994.