Italy had to pay investors higher rates of return at a bond auction yesterday, reflecting increasing unease over risk of contagion and scepticism about whether an upcoming EU summit can stem the debt crisis.

The government sold a total of €3.9 billion worth of bonds, including €2.99 billion in zero coupon notes due to mature in 2014 at a yield of 4.712 per cent compared with 4.037 per cent on May 28.

It sold €626 million in Treasury inflation-indexed bonds set to expire in 2016 at a rate of 5.20 per cent compared with 4.39 per cent on May 28.

The Treasury also borrowed €290 million in inflation-indexed bonds due in 2026 at a rate of 5.29 per cent, the Bank of Italy said.

Italy has come back into the debt crisis line of fire, despite Prime Minister Mario Monti’s efforts to calm markets –including a promise to get a labour reform adopted this week ahead of a Brussels summit tomorrow and Friday.

The higher yields reflect a lack of confidence among investors that the crucial meeting between EU leaders will produce concrete measures to put out the debt-crisis flames which are threatening to engulf weaker countries.

Fears have been growing that recession-hit Italy, which has a colossal debt worth more than 120 per cent of its Gross Domestic Product, will be the next country to end up in the debt-crisis mire after fellow sufferer Spain.

All eyes will be on short and medium-to-long term bond sessions scheduled for today and tomorrow, which are being seen as the real test of investor confidence in Italy.

Today, Rome will attempt to raise €9 billion in six months bonds, while tomorrow it hopes to borrow up to €5.5 billion in five- and 10-year bonds.