By Deepa Babington
ROME (Reuters) - The Italian parliament gave final approval on Wednesday to a much-altered austerity plan aimed at stemming a debt crisis engulfing the euro zone's third largest economy.
The final vote on the 54-billion-euro ($73.8 billion) mix of tax hikes and spending cuts passed in the lower house of parliament by a comfortable 14 votes, after the government also won a confidence vote on the package earlier in the day.
The focus now shifts to whether a weak and scandal-plagued government can implement the promised reforms and if more austerity measures will be needed to head off a crisis that has driven Italy's borrowing costs close to unmanageable levels.
Italian officials have said further measures could be introduced, with possible options including the sale of state properties and other assets as well as longer term structural reforms to spur growth.
The bill's chaotic passage through parliament has exposed deep divisions in Berlusconi's fractious coalition, triggered street protests and raised doubts about Italy's will to follow through on plans to balance the budget by 2013. The upper house Senate approved the plan on September 7.
"Now the key is determination and implementation of the measures," International Monetary Fund Managing Director Christine Lagarde told La Stampa daily ahead of Wednesday's votes.
"It's the only way to convince markets and other partner countries of the seriousness of the initiatives taken."
Economy Minister Giulio Tremonti is expected to explain the package to his euro zone counterparts at a gathering in Poland on Friday, an official preparing the meeting said.
Hundreds of demonstrators clashed with riot police outside parliament as the final voting took place, letting off firecrackers, and overturning bins and parked motorcycles.
Markets, on edge over Greece, have turned on Italy with a vengeance over the past two months, hammering bonds and banking stocks due to concerns about a chronically stagnant economy and the sustainability of a 1.9-trillion-euro debt mountain.
Bond buying by the European Central Bank offered a brief respite but a spike in yields over the past week triggered fresh alarm bells, underlining how far market sentiment has swung against Italy.
Yields on Italy's 10-year bonds dropped back to around 5.6 percent on Wednesday, but still uncomfortably close to the 6 percent level topped before the ECB intervention.
The spread over benchmark German debt also eased to 374 basis points on Wednesday after going past 400 points on Tuesday, while Milan's blue-chip stock index pared back early losses to rise 2.7 percent.
Too big to bail out like smaller Greece and Ireland, Italy has the potential to trigger a breakdown that could tear the single currency apart.
Along with a public debt burden that is second only to Greece in the euro zone at 120 percent of gross domestic product, Italy has one of the world's most sluggish economies. Some analysts expect it to tip back into recession next year.
Nearly a third of its youth are unemployed, its labor market is strangled by laws that make it nearly impossible to fire anyone but temporary workers, and its state bureaucracy is riddled with inefficiencies and high costs.
"Italy is the key to contain this crisis," said Domenico Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution.
"It is the last window of opportunity before a serious prospect of a meltdown of the euro."
Plagued by sex scandals, corruption trials and squabbling partners, Berlusconi's own position looks increasingly shaky.
A premier who came to power promising to save Italy from Communists and leftists bent on tax hikes has now been forced to raise taxes and court China to prop up Italian bonds.
"The hope that the Chinese breathe oxygen into Italy by buying a bit of bonds is a historic embarrassment," Gian Antonio Stella wrote in the Corriere della Sera daily. "And what if they now leave us to boil?"
Berlusconi has tempered his perennial optimism with dire predictions of Italy ending up like Greece without the austerity plan. Italians, however, are unimpressed and have responded with public protests and strikes.
The media magnate's fragile coalition fought over the austerity package for weeks, chopping and changing the plan four times before the final version was agreed in the face of opposition to key parts by Economy Minister Tremonti.
The measures included in Wednesday's austerity package include a one percentage point increase in value added tax, bringing forward plans to increase the pension age for women and a special levy on energy companies.
(Additional reporting by Francesca Landini and Gavin Jones; Editing by Barry Moody, Janet Lawrence and Peter Graff)