Seeking to calm fears of an escalating debt crisis in Europe, Italy’s embattled Prime Minister Silvio Berlusconi unexpectedly unveiled a plan for widespread economic reform Friday that would speed up painful austerity measures and move the world’s seventh-largest economy toward adoption of a balanced-budget amendment.

The sweeping plan, which came just 48 hours after Berlusconi had dismissed the need to do more, came as pressure intensified on European leaders to stem the slide of massively indebted Italy into the same kind of fiscal crises that have swept over the smaller economies of Greece, Ireland and Portugal. Berlusconi’s announcement appeared to pave the way for the European Central Bank to engage in a buying spree of Italian bonds in an attempt to bring its borrowing costs down from unsustainably high levels.

Berlusconi’s move came after European heads of state interrupted their summer vacations, scrambling for a consensus in a flurry of phone calls. But it remained unclear whether the package would be enough to ease the panic over Europe’s debt crisis that, along with fears of a slowdown in the United States, erased $2.5 trillion off global stock markets this week. European markets closed lower Friday after another volatile session.

The Europeans, analysts noted, were falling far short of the kind of financial shock and awe unleashed by Washington in 2008 to contain the U.S. financial crisis, expressing little political will to put up the kind of cash it would take to bail out Italy and troubled Spain should their plights worsen.

It brought into focus the stark options ahead for a group of 17 European nations that for years have sought to share one currency without making the politically hard decisions that would make German and Italian taxpayers, for instance, just as liable for the region’s collective debt as residents of, say, Virginia and California are to U.S. debt.

If Italy’s plan fails to calm markets, analysts warned that Europe’s only way to resolve the crisis may be through tough, bold steps to integrate more fully — or face the prospect of a messy breakup of the euro zone.

“This is about the future of Europe now,” said Peter Bofinger, an influential German economist. “If Italy blows apart, the [euro zone] blows apart. This isn’t like Portugal or Ireland or Greece. The consequences for Europe are now great. They have to, they must, act.”

Berlusconi, a leader plagued by sex and financial scandals who has warred with his finance minister over cuts, acted after Italy’s borrowing costs jumped higher than Spain’s on Friday. He laid out a reform plan aimed at balancing the budget a year early — by 2013 — and tackling the highly charged issues of welfare and labor reform.

It amounted to a recognition that an austerity plan passed by Rome fell short of investor hopes.

“We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early,” Berlusconi said, adding that finance ministers from the Group of Seven industrial nations would hold an emergency meeting in coming days.

But as European officials sought to reassure markets, there were more signs of the kinds of divisions that have left euro-zone leaders stumbling from one failed bandage to another in their attempts to resolve the region’s nearly two-year-old debt crisis, which is on the verge of being critical.

Ballooning concern

Concern over Italy is growing in large part because Europe’s economies are slowing, along with the United States, at the same time that investors are newly focused on the crushing debt loads of wealthy nations. Though a snapshot of the Italian economy released by authorities Friday indicated that the country’s economic growth is doing better than some other nations in the region, investors were fixating on its whopping $2.2 trillion pile of debt and the question of who would aid Italy if it cannot pay its bills.

The Europeans have limited options. If Italy’s and Spain’s borrowing rates continue to soar, both nations could effectively be priced out of private markets.

Europe, led by Germany, has bailed out Greece, Ireland and Portugal. But voters in frugal Germany, the largest single economy in the euro zone, have had it with bailouts. In a worst-case scenario, Italy would need $1.2 trillion to cover its borrowing for the next three years, or more than double the size of an established European rescue fund.

This week, Jose Manuel Barroso, president of the European Commission, called for expanding the war chest for bailouts. But his effort was shot down by Germany, among others. On Friday, Olli Rehn, the European Union commissioner for economic affairs, said there was no consensus by leaders to go beyond a July 21 agreement that offered a further bailout to Greece, saying European leaders would not yet move to increase available rescue funds.

That July 21 deal would also allow European rescue funds to be used to buy up the bonds of troubled nations in times of crisis, but the pool of cash available, about $616 billion, does not approach the level needed to aid Italy or Spain. In addition, all 17 nations in the euro zone still need to ratify that deal before it can go into effect.

Analysts’ outlook

Analysts believe that the European Central Bank will step in with a massive program to buy up Italian and Spanish debt to drive down their borrowing rates. As a sign it is moving in that direction, the bank on Thursday began to scoop up the debt of smaller Portugal and Ireland. But even that measure was opposed by Germany, and analysts say it is likely to amount to only a short-term solution.

If Italy or Spain fails to quell market panic, analysts say, Europeans might be forced to move toward the advent of a new euro-bond, putting the economic weight of Germany behind its profligate neighbors. But Germany and other northern European nations remain opposed to such a deal, as well as the more radical step of a more established fiscal union that would go further in turning a vast chunk of Europe into one giant economy.

Analysts say it is the lack of clarity of how Europe could cope with a worst-case scenario in Italy or Spain that is fueling the crisis.

“A new phase of the euro debt crisis has developed,” Citibank economists warned in a report Friday. Rather than reflecting developments in Italy and Spain, they cited “the lack of an adequate policy response at the EU level and the absence of a lender of last resort for these two large euro countries.”