As European leaders braced for more on Spain's worsening economic crisis, Italy on Wednesday bought back 1.33 billion euros (1.61 billion U.S. dollars) in bonds to ease domestic pressure after Moody's recent downgrade.

Italian Prime Minister Mario Monti has faced a new wave of criticism for the country's economic woes since the European Union (EU) summit at the end of June.

"The Monti government's reforms have caused the collapse of the country," said Roberto Caldaroli, a former government minister and senator from the Northern League party.

"There has been no worse time for public debt, the bond spread, unemployment or fiscal pressure. The first, most urgent reform, should be to send the Monti government home as soon as possible."

Giorgio Squinzi, head of Italy's largest employer group, Confindustria, said Wednesday the country was like "a ship in a storm" and had to do everything possible to deal with the crisis.

"It is clear we are facing a difficult time with a direct impact on the economy and employment," Squinzi said.

The spread on Italy's 10-year bond against the German benchmark jumped to a worrying 522 points in afternoon trading on Wednesday, despite speculation that the new Eurozone Stability Mechanism may be granted a banking license to enable it to borrow money from the European Central Bank to increase its financial resources.

"Europe must demonstrate that it knows how to take care of itself," Italy's Economic Development Minister Corrado Passera told reporters earlier in the day when asked about the roller coaster ride in the bond market.

Nevertheless, Italy's largest bank, Unicredit, said there were encouraging signs in bank lending rates across Europe.

"Despite the re-intensification of the sovereign debt crisis and the renewed deterioration of the economic outlook, the net tightening of lending standards by eurozone banks was broadly stable compared to the first quarter of the year," said Marco Valli, Unicredi's chief eurozone economist.

"This is better than our expectations. The renewed deterioration of the financial and macroeconomic environment in the second quarter seems to have had only a limited impact on banks' willingness to lend, confirming our assessment that the eurozone is not witnessing a credit crunch," he said.

"At the same time, credit demand remains depressed, mainly reflecting ongoing weakness in the business cycle."

Investors remain nervous about Italy's economic outlook after Monti imposed a compulsory plan to restore financial stability to the near bankrupt southern region of Sicily.

While Monti and governor Raffaele Lombardo agreed on "a plan for financial recovery and reorganization," there is concern about the region's ballooning public sector and its 5.3 billion euros (6.43 billion dollars) of debt.

Gaetano Armao, Sicily's economic commissioner, sought to reassure foreign journalists on Wednesday by describing the debt as "sustainable." "It is not true that we have collapsed," Armao said.

Armao also denied that the EU had frozen millions of euros in funds because of concerns about accountability.

"They have not blocked anything, they have suspended the funds while they wait for more information. It's a request for clarification."

Sicily, which accounts for about 5.5 percent of Italy's GDP, is adding to concern about the financial stability of regional and city governments across Italy.