By Philip Pullella
ROME (Reuters) - Italy's austerity budget should pass its first parliamentary hurdle on Thursday but the opposition says Prime Minister Silvio Berlusconi's government is in a shambles and should resign after it is finally approved.
Italy's delicate position was underscored by a bond auction hours before in which the Treasury managed to sell 4.97 billion euros of long-term paper but only at a hefty price, with high yields that analysts said were unsustainable.
Addressing the Senate shortly before the vote was due to start, Economy Minister Giulio Tremonti said Europe needed a political solution to the unraveling debt crisis because no country would be spared dire consequences.
"No-one should have any illusions of individual salvation. Just like on the Titanic, not even the first class passengers will be saved," he said, referring to Europe's stronger economies.
The four-year package, which has been increased to 47.972 billion euros ($68 billion) from 40 billion euros in the last 24 hours, aims at balancing the budget by 2014.
It is due to be approved by the upper house Senate at about 2 p.m (1200 GMT) ahead of definitive approval by the lower house, the Chamber of Deputies, on Friday. Berlusconi has a majority in both houses.
The opposition is voting against the measure but has said it will not present amendments or carry out any filibustering tactics -- it hopes to show voters it is acting responsibly to overcome the crisis.
To underscore its resolve, the government called a confidence vote on the measure in order to streamline the passage.
Bond traders have targeted Italy, the euro zone's third-largest economy, because of doubts about its ability to sustain one of the world's heaviest debt burdens and fears it is getting sucked into a widening debt crisis.
Thursday's auction was seen as a vital test of Italy's ability to tap into the bond markets and keep refinancing a debt mountain equivalent to 120 percent of gross domestic product, second only to Greece in the euro zone.
But while nearly all of the bonds were sold, analysts said the rise in borrowing costs would be unsustainable in the long term.
The political consensus on debt-cutting measures earlier this week helped calm nervous markets, which picked up after suffering heavy losses last week and early this week.
The Democratic Party (PD), the largest opposition group, has demanded the resignation of Berlusconi's government, saying it is too weak to face up to the storm on financial markets.
But instead of aiming for potentially traumatic early elections immediately, the PD and other opposition forces have floated the idea of a transitional government to lead the country to the scheduled elections in 2013.
Berlusconi, who has steadfastly refuses to resign despite a sex scandal and corruption trials, has emerged bruised from this week's financial crisis during which he has been all but invisible to the public.
After attacking the Tremonti in a newspaper interview last week which highlighted persistent cabinet divisions, he has made no public appearance to speak about the market turmoil, only issuing a written statement on Tuesday.
Seen by international investors as a guarantor of Italy's financial stability, Tremonti's position appears to have been strengthened, even as his already tense personal relations with Berlusconi have worsened.
The opposition has demanded that Berlusconi play no role in any transitional government and Tremonti has been touted by some as a possible key member, perhaps even as prime minister.
Massimo D'Alema, a former prime minister and currently an opposition leader, told the economic newspaper Il Sole 24 Ore on Thursday the PD was willing to support a transitional government whose aim would be to weather the financial crisis, spur growth and make changes in the county's electoral laws.
Many observers say already tense relations between Berlusconi's People of Freedom party and its coalition partner the Northern League may develop into a full-blown government crisis, perhaps as early as September.
(Additional reporting by James Mackenzie and Giuseppe Fonte and Valentina Za in Milan; editing by Alastair Macdonald)