The European Commission said on Tuesday that the Italian economy was underperforming.
The EC said it expected Italy's GDP to grow by 1.9% this year, a figure which was slightly lower than the government's target 2%.
The EC noted that the growth forecast was "below Italy's potential" and substantially lower than the average predicted for the euro zone (2.5%) and the European Union (2.8%).
"But confidence in the service and production sectors remains high," the EC added.
Italian Premier Romano Prodi's centre-left government initially expected GDP to rise by 2.2% this year but it recently lowered its forecast to 2% due to a slowdown in the economy.
National statistics bureau Istat confirmed the slacker trend on Monday, saying that GDP rose only 0.1% in the second quarter over the first, when growth of 0.3% was posted.
Comparing the second quarter to the same period last year, Istat said GDP increased 1.8% whereas annual growth in the first quarter amounted to 2.3%.
The Italian economy posted its best performance in six years in 2006, with growth of 1.9%.
From 2001-2005, GDP growth averaged less than 0.7% per year.
The opposition blamed the current downturn on the government, saying the 2007 budget contained too many tax hikes and spending cuts which had put a brake on growth.
The rightist National Alliance said that "Prodi's budget is causing a recession".
Prodi and Economy Minister Tommaso Padoa-Schioppa argue that the 34.7-billion-euro budget was essential for curbing Italy's rising deficit and debt levels and meeting EU public accounts targets.
The cabinet is now working on next year's budget which Prodi has promised will be a lighter manoeuvre with no tax increases.
The premier said last week that "the public accounts emergency is over... This year, we have the advantage of not having to straighten them - we can limit ourselves to keeping them in order".
The government is due to approve the budget on September 29.
ALMUNIA ISSUES ACCOUNTS WARNING.
Monetary Affairs Commissioner Joaquin Almunia on Tuesday urged all European governments to "stick to the path of structural reforms" and "consolidate the state of their public accounts".
The recommendation applied to Italy in particular, which has the third biggest debt mountain in the world.
The government sees Italy's debt burden falling to 105.1% of GDP this year compared to 106.8% last year and dropping below 100% by 2010.
The forecasts are contained in the centre-left administration's draft DPEF, a key four-year economic and budget planning document.
The DPEF forecasts a budget deficit of 2.5% this year, down from 4.4% in 2006.
The 2006 deficit was the highest in ten years and meant that Italy had breached the EU's 3% deficit cap for four years running.
But the EU has expressed concern over the DPEF, urging Italy to increase its efforts to consolidate public finances.
The International Monetary Fund has also criticised the DPEF as being "not in line" with its recommendations and failing to provide "what Italy needs".
It called for more money to be spent on cutting the deficit and debt.
