By Gavin Jones
ROME (Reuters) - Italy dug in its heels on Tuesday over its budget deficit despite pressure from Brussels and its euro zone partners, as leaders of the coalition in Rome threatened to sue EU officials over a deepening market sell-off.
The government last week set a deficit target of 2.4 percent of economic output for the next three years. That tripling of its predecessor's goal unnerved already jittery investors and prompted criticism and calls for a rethink from the European Commission.
"We are not turning back from the 2.4 percent target... We will not backtrack by a millimetre," Luigi Di Maio, deputy prime minister and leader of the anti-establishment 5-Star Movement, said in radio interview.
As Italian bonds and banking shares sold off sharply on Tuesday, Di Maio said there was "no doubt" the leaders of France and Germany wanted the Italian government to fall, while one lawmaker suggested the country would be better off outside the euro.
The ruling coalition, which joined forces in June on promises to slash taxes and boost welfare spending, directed its anger at Brussels. Its other deputy Prime Minister, right-wing League leader Matteo Salvini, said it might seek compensation from the EU over Italy's rising borrowing costs.
"The words and the threats of Juncker and other high EU bureaucrats continue to raise the spread (between Italian and German bond yields). We are ready to seek damages from those who want to harm Italy," Salvini said.
EU Commission President Jean-Claude Juncker drew parallels on Monday between Italy's budget plans and the finances of Greece, which emerged from its third international bailout as recently as August.
While the headline deficit of 2.4 percent that Italy is proposing would be within the Commission's 3 percent limit, under the current plan the structural - or underlying - deficit would rise, which runs contrary to EU rules.
The Commission is also concerned the proposal will add to Italy's huge public debt pile, proportionally the second highest in the EU after Greece's. The government says the debt will fall as the expansionary budget spurs economic growth.
'STRICT WITH ITALY TO SAVE EURO'
In Luxembourg, the Commission's Vice President for the euro Valdis Dombrovskis said it was open to dialogue and hoped Italy would bring the budget draft into line with EU rules.
On Monday, Juncker said the EU must be "strict" with Italy to avoid putting the euro project at risk.
Salvini called that a "threat" that "no-one in Italy is taken in by". He said the government's priority was to respond to its citizens' needs and criticism of its budget "will not stop us."
The government's task is made harder by the pressure on Italian bonds which intensified on Tuesday, when eurosceptic League lawmaker Claudio Borghi said the country's economic situation would improve outside the euro zone.
Borghi is not a minister and did not suggest the government planned to drop the euro, and Di Maio and Prime Minister Giuseppe Conte later reiterated the official line that Rome has no intention of leaving either the euro zone or the EU.
"The euro is our currency and for us it is unrenounceable," Conte said on Facebook. Declarations suggesting otherwise must be seen as "free and arbitrary opinions that have nothing to do with the policies of this government."
Di Maio said Rome's adversaries were hoping to use financial markets to weaken the ruling coalition, but their bid would fail because the 5-Star/League alliance was more united than ever.
Economy Minister Giovanni Tria, a moderating but seemingly increasingly isolated voice in government who is a member of neither party, left a gathering of EU finance ministers in Luxembourg late on Monday to return to Rome to put the finishing touches to the budget plan.
The document is expected to be published in coming days but could be released as soon as Tuesday.
(additional reporting by Giselda Vagnoni and Massimiliano Di Giorgio, Editing by John Stonestreet)