(Adds details, quotes, background)By Stefano Bernabei and Giuseppe FonteROME, May 31 (Reuters) - The Bank of Italy warned on Fridaythat the country's $2.6 trillion of debt may swell this year bymore than the government forecasts and called for "credible"measures to curb it.Concerns over Italy's public finances have driven up Rome'sdebt costs since a populist government took power a year ago.The central bank's warnings pushed up the risk premiumItalian bonds pay compared with safer German debt to its highest since December, at almost three percentage points. "ThetensionsinItaly'sgovernmentbondmarketare
curbinggrowthprospects," Bank of Italy Governor IgnazioVisco said in the text of a speech prepared for the centralbank's annual meeting.Visco said at the end of the year debt as a percentage ofgross domestic product year could top the 132.6 percent forecastset in the budget, which relies on the government managing toraise 18 billion euros from privatisations.Italy pocketed 60 million euros from privatisations in2017-2018, missing a yearly target of 5 billion euros, Bank ofItaly data showed. Italy's debt-to-GDP ratio, second only to Greece's within theeuro zone, has risen from a pre-crisis low of below 104% hit in2007 to 132.2 percent at the end of last year."The high debt-to-GDP ratio continues to be a severeconstraint," Visco said. "There must be no delay in defining arigorous and credible strategy for its reduction in the medium
term."Visco urged the government to find offsetting measures if itwanted to keep good on a pledge to avoid a scheduled increase inthe sales tax.Freezing the sales tax hike without countermeasures "wouldbe incompatible with a reduction in the debt-to-GDP ratio."The government currently targets a 2.1 % deficit-toGDP-ratio for 2020, including some 23 billion euros from salestax hikes due to take effect next year.Visco said that running higher state deficits in an attemptto provide a "temporary relief" for Italy's stagnating economycould prove "less than effective, even counterproductive" if itended up hurting confidence.Emboldened by a victory in last week's vote for the Europeanparliament, League leader Matteo Salvini has made a priority ofreducing Italians' high tax burden by introducing a single taxrate.A senior source within the ruling 5-Star Movement toldReuters on Friday they backed the League's to fund the "flattax" measures through a higher budget deficit. (Reporting by Stefano Bernabei, Giuseppe Fonte; editing byValentina Za, Larry King and Raissa Kasolowsky)