Italy was yesterday put in the dock as the first country to face disciplinary action under the European Union's revamped stability pact, amid fears that public borrowing in the eurozone is getting out of hand.

The European Commission wants to crack down on Italy's ballooning budget deficit to set an example to other countries, and to prove that the euro-area can still maintain budgetary discipline.

But finance ministers meeting in Luxembourg fear that borrowing in Germany, the eurozone's biggest economy, is equally worrying and threatens to undermine the credibility of the pact.

Leaders of the opposition Christian Democrats, favourites to win German elections in the autumn, have warned the German deficit would top the EU's 3 per cent of gross domestic product limit until 2007, and that it may not be remedied until 2009.

The rising tide of red ink across the 12-country eurozone compounded an air of gloom at yesterday's Ecofin council, against the background of political uncertainty caused by a double rejection of the EU constitution.

With markets fretting about the long-term prospects of the euro, Joaquín Almunia, EU monetary affairs commissioner, was determined to show that fiscal discipline had not broken down by starting proceedings against Italy.

Mr Almunia's report, adopted by the Commission in Strasbourg yesterday, highlighted how Italy had used faulty statistics to hide the fact that it had broken the pact's deficit rules in 2003 and 2004. He also predicted "excessive deficits" for 2005 and 2006 and pointed out that Italy's public debt at 106 per cent of GDP was far above the EU's 60 per cent target.

"The report indicates that this situation is not exceptional," Mr Almunia said.

The stability pact was made more "flexible" by EU leaders in March, a move strongly criticised at the time by the European Central Bank as likely to lead to a relaxation of fiscal discipline.

The new rules allow countries to escape action under the pact if their breach of the 3 per cent deficit ceiling was "small and temporary" and if they had sound underlying finances.

Although the Commission's report will now go into the Brussels machine for scrutiny by national treasury officials, few people doubt that the Italian case will be referred for further action to finance ministers, possibly in July.

The government of prime minister Silvio Berlusconi would then be asked to take action to curb the deficit, a move which would run counter to his own instincts to cut taxes in the run-up to a general election.

The pressure on Italy has prompted three ministers in Mr Berlusconi's government to call for a reintroduction of the lira - an idea dismissed as "nonsense" by Jean-Claude Juncker, Luxembourg president of the eurozone finance ministers.

The only bright spot at the meeting was a publication by the International Monetary Fund saying that structural reforms in some countries, including Germany, were starting to work.

Jean-Claude Trichet, ECB president, reiterated at a conference in China that the central bank was not preparing to cut interest rates. But in a change of tone since last Thursday's meeting of the bank's governing council, the ECB has stopped ruling out the possibility of a cut at some point in the future.