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Italy's Prime Minister Mario Monti.Andres Kudacki/The Associated Press

Italy's economy contracted by 0.7 per cent in the second quarter, data showed on Tuesday, compounding the difficulties for Mario Monti's technocrat government as it grapples with a debt crisis that threatens the whole euro zone.

The 0.7 per cent fall in gross domestic product was the fourth consecutive drop for an economy mired in recession since the middle of last year, with the rate of contraction easing only marginally from a 0.8 per cent decline in the first quarter.

The data was slightly weaker than expectations. The median forecast in a Reuters survey of analysts pointed to a 0.6 per cent fall.

Official statistics agency ISTAT reported that GDP was down 2.5 per cent year-on-year after a fall of 1.4 per cent in the first quarter, posting the steepest fall since the end of 2009.

Italy has been the euro zone's most sluggish economy for more than a decade, fuelling investor concerns about its ability to bring down public debt of around 123 per cent of output.

The recession weakens tax revenues and hits jobs and consumption in a vicious circle which makes it harder for Mr. Monti, who is aiming to cut the budget deficit to 0.1 per cent of GDP in 2014, to meet his public finance goals.

Employers' lobby Confindustria forecasts that the economy will contract by 2.4 per cent this year, twice as much as the government's official projection of – 1.2 per cent.

Mr. Monti passed austerity measured worth more than €20-billion ($25-billion U.S.) at the end of last year to head off a mounting debt crisis but the package, made up largely of tax hikes, sapped consumer morale and deepened the recession.

Per capita consumer spending will fall by more in 2012 than at any time in Italy's postwar history, the country's main retail confederation said last week.

With Italian benchmark bond yields still stubbornly close to 6 per cent, Mr. Monti has repeatedly warned his European partners that unless they show flexibility towards Italy on public finances then the country could soon be run by a eurosceptic government with little commitment to fiscal consolidation.

Mr. Monti has pledged to step down next spring, when new elections are due.

ISTAT gave no numerical breakdown of GDP components with its preliminary estimate, saying only that activity contracted in agriculture, industry and services.

It said so called "acquired growth" at the end of the first quarter stood at –1.9 per cent.

This means that if GDP posts flat quarterly readings in the final two quarters of 2012, over the whole year it will be down 1.9 per cent from the previous year.