The Italian government is battling for survival as its debt problems mount, worsened by the announcement from George Papandreou, Greece’s prime minister, that he will put the latest eurozone bail-out to a referendum.

As world leaders gather in the south of France for a two-day meeting of the G20 countries, the heads of the eurozone states are scrambling to contain the damage from Papandreou’s announcement, which put in doubt a deal agreed last Thursday (27 October) in Brussels by the 17 countries of the eurozone.

Nicolas Sarkozy, France’s president, and Angela Merkel, Germany’s chancellor, summoned Papandreou to Cannes for emergency talks last night, on the eve of the G20 meeting, where they were to urge him to accept the deal.

Speaking in Berlin before her departure for Cannes, Merkel said: “We agreed a plan for Greece last week. We want to put this plan into practice, but for this we need clarity and the meeting tonight should help.”

The European Financial Stability Facility (EFSF), the eurozone’s bail-out fund, yesterday (2 November) cancelled its plans for a €3 billion bond issue. The EFSF had been hoping to raise capital to finance its bail-out of Ireland.

The European Central Bank was again forced to buy up Italian debt as the yield on ten-year Italian government bonds stayed above 6%, after touching 7% on Tuesday – a level that is not considered sustainable.

In turn, Silvio Berlusconi, the Italian prime minister, was forced to draft new proposals for reforms to the public finances, in an attempt to calm the doubting markets. An emergency meeting of leading ministers was called for last night.

Giorgio Napolitano, the country’s president, hinted that if Berlusconi did not take action he might use his presidential powers to push for an alternative government.

“At this critical moment, the country can count on a broad swathe of social and political forces keenly aware of the need for a new perspective,” Napolitano said. He added that those forces could come together to get an agreement on “the choices which the EU…and market operators urgently expect of Italy”.

Berlusconi has so far failed to persuade his partners in the government coalition to fast-track reforms that he has promised the EU, including increasing the country’s retirement age from 65 to 67 and making it easier to fire employees.

Additional steps now being considered include opening up the labour market to more competition, a tax on Italy’s highest earners, and measures to combat tax evasion and scrap tax breaks.

While Italy tries to stave off seeking international help, Greece’s second bail-out has been put in doubt by the referendum proposal. Papandreou’s government faces a vote of confidence in the parliament tomorrow (4 November).

José Manuel Barroso, the European Commission president, appealed for unity in Greece, saying: “We have agreed on far-reaching measures to support Greece. But for those measures to be implemented, it is critically important to have stability in the country.”

He called on all Greek political leaders “to show that they are ready to work for national political unity and […] the broad support needed for the implementation of the [rescue] programme”.

François Fillon, France’s prime minister, said that Greeks had to decide quickly “and without ambiguity whether they choose to keep their place within the eurozone”.

Barroso warned that a rejection of the deal would make the life of Greeks “much more painful”, adding that the consequences “would be impossible to foresee”.