(File image) Italian Prime Minister Mario Monti

Rome - Prime Minister Mario Monti laid down a challenge to Italy's unions on Tuesday with plans for deeper-than-expected spending cuts and public sector job reductions as part of a spending review that drew threats of strike action.

Monti, his standing strengthened by winning European Union backing for a plan to use EU bailout funds to limit the damaging volatility that has hit Italy's sovereign bonds, has been hammering out the details of the spending review this week.

According to a source present at a meeting between Monti and local government officials, Monti expects savings from the spending review to be “much higher” than the 4.2-billion euros indicated hitherto. The value of the 2012 cuts could be as high as seven billion euros, sources told Reuters last month.

He also outlined cuts that include overall personnel reductions of 10 percent and a 20 percent cut in the number of state managers, without giving a timeline.

The government is under pressure to find additional savings to avoid the need for a two percentage point hike in value added tax which is otherwise due to come into force in October.

In addition to the savings already set, the government must find extra cash to help pay for the damage caused by two major earthquakes in the Emilia Romagna region in May, which caused an estimated five billion euros worth of damage.

However it has run into opposition from labour unions who are fiercely resisting public sector job cuts.

“Be careful of creating social conflict,” Susanna Camusso, leader of Italy's largest labour union, the Cgil, said before meeting the prime minister.

Camusso said a unified general strike by all the unions in favour of jobs “must be used”. Raffaele Bonanni, the head of the second biggest union, said on Monday that he was ready to call a nationwide general strike if cuts were indiscriminate.

Unions have already forced the government to water down labour reforms intended to loosen up hiring and firing rules to create more flexibility in the jobs market and cut record youth unemployment.

By winning support for the bond-buying scheme at last week's EU summit, Monti strengthened his political support at home - which had looked increasingly unstable - and this week's rush to pass spending cuts is aimed at building on his new momentum.

The natural end to Monti's technocrat mandate is the first quarter of next year, but there had been a flurry of talk about a vote in the autumn if Monti came home from Brussels empty handed.

“I hope that in the few remaining months, and by this I mean until the spring of 2013, you will see us often acting both on the Italian and European front with more serenity,” Monti said in parliament on Tuesday.

Deputy Economy Minister Vittorio Grilli called the cuts “urgent”, adding that Italy was still “under special surveillance” at a European level, according to a source present at Tuesday's meeting with local authorities.

Apart from reducing personnel levels, the government plans to further centralise the state's purchases of goods and services - in particular for health care - and to close secondary offices. - Reuters