Rome: Italy's lower house of parliament is set to approve austerity measures later, paving the way for an emergency government to replace that of Prime Minister Silvio Berlusconi.

The vote comes days after the country was pushed to the brink of needing a bailout that the eurozone cannot afford.  Berlusconi has indicated that he will stand down as soon as the reforms are fully approved, which could be as early as this weekend.

The measures include a rise in VAT from 20% to 21%, an increase in the retirement age and widespread job cuts. Earlier in the week Italy's borrowing costs reached record highs, prompting concerns that it could default on the debt.

Stock markets received a boost as Italian policymakers approved the financial reforms and Greece also moved to stabilise its battered economy, with new prime minister Lucas Papademos being sworn in to head up a an interim government.  But ahead of a rally on Saturday against austerity measures in Portugal, there have been renewed fears about eurozone debt contagion spreading to France.

Leading economists warned the £261bn worth of Italian debt that French banks hold leaves them dangerously exposed. The fears come after ratings agency Standard & Poor's accidentally sent out a message saying it was downgrading the country's prized "AAA" rating. The mistake stood for an hour and a half before it was retracted. There are also fresh concerns about Spain after its economy - the eurozone's fourth largest - stopped growing in the third quarter, putting its deficit-reduction goals in doubt.

In Rome, Mario Monti, 68, is being lined up as the potential leader of a broader all-party technical government which is expected to be up and running by Monday. The country's finance minister, Evangelos Venizelos, remains in his post.

President Barack Obama has urged European leaders to take dramatic action to stem the crisis. But Labour leader Ed Miliband has accused the Government of wrongly blaming all of Britain's economic problems on the eurozone troubles. He said more work was needed at home to stop Britain sliding back into recession, despite a "pressing need" to deal with the beleaguered single currency.

Prime Minister David Cameron, Chancellor George Osborne and Deputy Prime Minister Nick Clegg all issued warnings on Friday of the potential fallout of the eurozone crisis on domestic fortunes. Cameron said there was "a big question mark" over the future of the single currency, meaning he could not rule out a "double-dip" recession in the UK.