Italy pays higher interest rate on latest bond sale

Italy has had to pay much more to borrow than a month ago as investors continue to worry about its huge debts.

Italy had to pay an interest rate of 4.8% to sell 3.5bn euros ($5bn; £3.1bn) of three-year bonds - up 1.1 percentage points from June.

Despite multiple attempts to contain the Greek debt crisis spreading, Italy and Spain have seen their borrowing costs rise in recent weeks.

Italy has the largest sovereign debt of any European country.

The rate on benchmark 10-year bonds, also sold by Italy on Thursday, was 5.77% - up 0.8 percentage points from June.

As a percentage of output, Italy's debt is second only to Greece in the eurozone - whose huge debts have led to two bailouts.

'Difficult environment'

Since the Irish Republic and Portugal have also been bailed out in the past year, investors have begun to fear that Italy might be next.

The inability of the US to agree a deal to pay its debts has also put pressure on financial markets.

"The auction came in a very difficult market environment, with the issue of US debt ceiling still unresolved", and speculation about the future of Italian finance minister Giulio Tremonti, analysts at Unicredit said.

"All this did not help to create a friendly environment for the auction."

Italy passed a 70bn-euro austerity package earlier this month to reassure investors that the country will not succumb to the debt crisis.

Meanwhile, the French finance ministry says that French banks and insurers have promised to give Greece easier lending terms on 15bn euros of bonds they hold.

As part of the latest eurozone bailout deal for Greece, private lenders to the country have been given the option of extending their bonds into new debt with longer maturities and lower interest rates.