Greece's efforts to close its budget gap have gone a long way but are "not sufficient", International Monetary Fund managing director Christine Lagarde said Monday.

Lagarde also said that the turmoil that has raised fears of an Italian financial meltdown is "essentially market driven."

"Some of the Italian numbers are excellent," she told reporters, adding that "It is clearly a fact that Italian growth has to improve."

With debt costs shooting up Monday for both countries and worries that a contagion would spread to more of Europe's weaker peripheral economies, Lagarde said Fund officials were on the ground in Brussels trying to help eke out a deal to stabilize Greece's finances with the region's finance ministers and bankers.

"We've got plenty of instability at the moment," she said.

"Greece has done a lot of work to reduce deficits and achieve fiscal consolidation in the range of five percentage points of GDP; this is a significant achievement." she said.

"Equally, we all know this is not sufficient, that more work needs to be done."

Lagarde's comments came as new worries in Europe sent stock markets plunging and debt cost soaring for Italy and Spain, the eurozone's third and fourth largest economies.

Beginning just her second week as head of the world's crisis lender, Lagarde, previously France's finance minister, downplayed Italy's problems.

"The primary deficit of Italy is one of the lowest," she said, referring to its basic balance of government operating expenditures versus income.

She described the country's high government debt as having "very particular characteristics" -- noting the fact that most of it is held inside the country.

But she said that Italy does need to implement already-agreed fiscal consolidation and austerity measures to reduce the country's deficit.

Bringing the deficit down to three percent of GDP in 2012 "is essential to restore the situation in Italy" she said.

She spoke after eurozone nations Monday agreed to beef up a rescue fund, currently at 440 billion euros ($617 billion), to prevent Europe's debt crisis spreading to Italy, Spain and beyond.

After eight hours of talks between the region's 17 finance ministers, Eurogroup chairman Jean-Claude Juncker said they had agreed a range of measures including "enhancing the flexibility and the scope of the EFSF," the European stability fund set up to buttress members in trouble.

The talks were scheduled to finesse a second rescue package for Athens in September, but faced extreme challenges in the markets, where traders fear a possible default by Athens on its debt.

In Athens, Greek Prime Minister George Papandreou earlier warned fellow EU leaders to end division over the bloc's sovereign debt crisis with a "resonant" message to sceptical markets "that there is a strong willingness to support Greece's ambitious programme of change."

"There is no room for indecision and mistakes... such as allowing cacophony to substitute for a common agenda and create more panic than security," Papandreou said in a letter to Juncker.

Lagarde meanwhile skirted questions on the specific nature of the challenges in Europe -- including one on bond rating agencies like Moody's and Standard & Poors, which have been criticized by European officials for adding unnecessarily to tensions over the bailouts of Greece, Portugal and Ireland with downgrades of government debt.

"They do play a role, there's no question about it," she said obliquely.

channelnewsasia.com