UPDATE 1-ECB's Visco says markets watching Italy closely
ROME, Feb 9 (Reuters) - Financial markets remain keenly focused on Italy's ability to control its public finances and pursue reforms to lift its stagnant economy, European Central Bank governing council member Ignazio Visco said on Saturday.
Confidence in Italy has been shaken in the run-up to elections, after a strong campaign by former Prime Minister Silvio Berlusconi threatened the prospects of stable government emerging after the vote.
"Italy must not lower its guard," Visco, the governor of the Bank of Italy, said according to the text of a speech at a conference in Bergamo.
"The attention of international investors continues to focus, rightly, on our capacity to preserve balance in public finances and to pursue with determination, an increase in our development potential," he said.
He said periodic bouts of market tension, which have been seen over the past few weeks as elections on Feb 24-25 approach, underlined the fragility of the situation facing Italy.
The main gauge of market sentiment towards Italy, the difference or spread between yields on 10 year BTP bonds and safer German Bunds has widened in the past few days and briefly topped 300 basis points on Friday.
European Economic and Monetary Affairs Commissioner Olli Rehn echoed the concern that the election could halt the course of reform in the euro zone's third-largest economy, which is stuck in recession with a public debt burden second only to Greece in the 17-member bloc.
"It's a very fragile situation. Whatever colour the new government in Italy has, it is important that it maintains the course of reform," he told an Austrian magazine in an interview published on Saturday.
The comments, as the election countdown begins, underline concern about the vote, which pits former prime ministers Silvio Berlusconi and Mario Monti in an uncertain three-way race for power against centre-left leader Pier Luigi Bersani.
Bersani is leading in the opinion polls but Berlusconi's campaign has cut into his advantage and threatened to force the centre-left and Monti to seek a potentially unstable coalition deal after the election.
Away from the main parties, the anti-establishment 5-Star Movement led by fiery comic Beppe Grillo, is also expected to take a large share of the vote, adding an additional uncertainty factor.
Visco repeated the Bank of Italy's forecast that the economy should start to recover in the second half of the year but said it was vital that the next government continue on the reform path laid out with its European partners.
He said it would have to focus on improving productivity, strengthening investment and improving the efficiency of public services but he also singled out the high overall tax burden as a crucial factor weighing down the economy.