Italy plans spending cuts over 7 billion euros: sources

Prime Minister Mario Monti was hugely popular when he took over in November to prevent a Greek-style debt default, but his tough austerity measures, which were mostly new taxes, have halved his appeal rating.

The spending cuts would help avoid further tax increases as Monti's falling popularity undermines his political strength.

The Cabinet plans to delay the approval of its savings decree until next week to finalise the larger-than-expected package, two government sources and one political source told Reuters.

Originally the cuts were said to be aimed only at preventing the VAT increase this year.

Parliamentary Affairs Minister Piero Giarda earlier this month had estimated the spending cuts would amount to about 5 billion euros, and last week government sources had said they could be as much as 7 billion euros.

"The idea is to approve a heftier decree, and that requires more time to work out where we can find the resources," said one government source, adding that the decision would be taken on Monday.

The austerity budget Monti passed last year includes an automatic increase in the main VAT rates by two percentage points in October, to 12 and 23 percent respectively, through 2013, and a further rise of 0.5 of a percentage point from 2014.

The spending cuts are also aimed at helping Italy meet targets to lower the budget deficit to 1.7 percent of gross domestic product in 2012 and 0.5 percent in 2013.

Most of the savings are expected to come from cuts in various ministries and public services.

French President Francois Hollande's five-week-old Socialist government is also preparing to raise some taxes and trim spending in order to ensure France hits its 2012 deficit target.

(Reporting By Giuseppe Fonte, writing by Catherine Hornby; Editing by Toby Chopra)