Europe's Next Headache: Italy

Italy's economy could contract by more than expected this year and the country needs credible economic policies to halt its long recession, the central bank said on Thursday.

Bank of Italy official Daniele Franco told parliament that the government's forecast of a 1.3 percent fall in gross domestic product this year could be in doubt if market tensions worsen or a global economic recovery is delayed.

"We need effective and credible economic policies to interrupt the recessionary spiral,'' he said.    Italy has been in recession since the middle of 2011. Attempts by political parties to form a new government have been deadlocked since last month's inconclusive election.