Raising the stakes in Europe's debt crisis, Austria's finance minister said Italy, the euro zone's third largest economy, may need a financial rescue because of its high borrowing costs.

Maria Fekter's comments in a television interview amplified investors' fears that Europe's leaders are far from ending two and a half years of turmoil. A deal by euro zone finance ministers on Saturday to lend Spain up to €100 billion to recapitalise its banks was seen by many in the markets as yet another sticking plaster.

Euro zone rescue funds, already stretched by supporting Greece, Portugal, Ireland and now Spain, might be insufficient to cope with Italy as well, Ms Fekter added in the interview last night. Today she sought to soften her remarks, saying she had no indication Italy planned to apply for aid.

"Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that - given the high rates Italy pays to refinance on markets - they too will need support," Ms Fekter said last night.

The Italian treasury declined to comment on Ms Fekter's remarks.

Italian and Spanish government 10-year bond yields rose further above the 6 per cent level on Tuesday as the aid deal for Spanish banks failed to ease fears about Madrid's ability to fund itself. European shares and the euro were little changed amid rising skepticism over the Spanish bailout plan.

The market reaction suggests that ministers have failed to break the so-called doom loop between rising government debt, economic recession and teetering banks that previously drove Greece, Ireland and Portugal into EU/IMF bailouts.

Analysts cited uncertainty about the mechanics of the Spanish rescue package and fears that private bondholders could be subordinated to official lenders, risking losses in any debt restructuring, as they suffered in Greece.

"Is this the next stage of a slippery slope in subordinating existing government bondholders?" asked Deutsche Bank strategist Jim Reid in a note to clients.

Investors are also worrying about the outcome of a Greek general election next Sunday which may determine whether the country stays in the euro zone.

European Commission president Jose Manuel Barroso, European Central Bank policymaker Christian Noyer and French finance minister Pierre Moscovici all called today for swift moves to create a euro zone banking union.

Mr Barroso told the Financial Times that a cross-border banking supervisor, a deposit guarantee scheme and a bank resolution fund could be put in place in 2013 without changing EU treaties. EU paymaster Germany has so far rejected a deposit guarantee or a resolution fund, saying they would require treaty change.

Britain, which is home to the euro zone's biggest financial center but is not in the single currency and opposes closer EU integration, should be allowed to opt out of such a union if it agreed not to block it, he said.

Ms Fekter's typically outspoken comments came after Italy's industry minister dismissed the idea that Rome may need external help, saying reforms adopted by his government so far had put the Italian economy on a sound footing.

Her concerns are shared by one of the German government's council of economic advisers, Lars Feld, who told Reuters that Italy could be next in line.

"Overcoming the troubles in Spain will bring calm to the markets for a while, but the chances are not so small that Italy may also come under fire, in particular as the promised labor market reform has turned out to be less ambitious," Mr Feld said.

The Austrian minister has a track record of speaking out of turn or undiplomatically. She angered Germany last month by suggesting Greece might be forced out of the European Union over its economic problems.

She infuriated Euro group chairman Jean-Claude Juncker in March by rushing out to brief the media on a deal to increase the euro zone's financial firewall before he could make the official announcement, forcing her to apologize.

And when US treasury secretary Timothy Geithner was invited to a euro zone finance ministers' meeting in Poland last year to plead for a more robust rescue fund, Ms Fekter said bluntly that Washington should look after its own worse fiscal mess first.

In Brussels, EU officials privately voiced exasperation at her latest comments on Italy.

"The problem is that this is market sensitive," said one euro zone official. "It's one thing if journalists write this but quite another if a euro zone minister says it. Verbal discipline is very important but she doesn't seem to get that."

Italy's leading economic newspaper, Il Sole 24, appealed to Germany on Tuesday to act to save the single currency before it is too late.

"Schnell Frau Merkel! (Hurry Up Mrs Merkel!)," the usually sober business daily said in a banner headline in German.

An editorial urged Chancellor Angela Merkel "to make three choices quickly to save the euro and build a politically united Europe".

She should back guarantees for European bank deposits, allow direct access for banks to euro zone rescue funds and accept a mutualisation of European public debts, with each country paying a different interest rates. Italy has the euro zone's second highest debt-to-GDP ratio after Greece.

Dr Merkel has opposed issuing joint euro zone bonds and says euro zone member states must agree to transfer more budget sovereignty to European institutions, including the EU's Court of Justice, as part of a political union before she would consider such idea.