ROME (AFP) - Italy's new Prime Minister Enrico Letta said on Monday his coalition government would act fast to reverse an austerity policy he argued was killing Italy and called on Europe to become a motor for growth.

"Italy is dying from austerity alone. Growth policies cannot wait," Mr Letta said during his inaugural speech to parliament, under the watchful gaze of European partners.

The recession-hit country, effectively rudderless since an inconclusive election in February, is under pressure to act fast to tackle social, economic and institutional ills.

The leftist moderate, who was sworn in with his cabinet on Sunday, promised to have results in 18 months or "take the consequences".

Mr Letta's hard-hitting speech appears to have reassured the MPs, who backed the new government by 453 to 153 in a confidence vote in Italy's lower house of parliament late on Monday.

Earlier, Mr Letta told parliament that the economic situation in Italy - one of the first countries to fall prey to the eurozone debt crisis - was "still serious" and its two trillion euro (S$3.2 trillion) debt "weighs heavily" on ordinary Italians.

But he also looked to Europe, saying it was suffering from "a crisis of legitimacy and... must become once more a motor of sustainable growth" - a reference to his aim to persuade Europe to reverse its disputed austerity policy.

The dream, he said, was a political European union. "The port we are sailing towards is called the United States of Europe. Our ship is democracy." Mr Letta will face an early test of his ambition to reverse Europe's austerity course when he travels on Tuesday to Berlin to meet German Chancellor Angela Merkel, who has championed deficit and debt reduction for beating the debt crisis.

He then goes on to Brussels to meet EU president Herman Van Rompuy.

The 46-year-old moderate from the centre-left Democratic Party said he wanted to deal quickly with the social fallout of the longest economic slump in 20 years by tackling a jobless rate of 11.6 per cent and regulating temporary job contracts.

"We need a welfare system which is more universal, more focused on young people and women, extending it to those who are not covered, especially temporary workers," he said.

He also said a controversial housing tax imposed by former prime minister Mario Monti would be suspended from June.

Mr Letta, a Catholic, promised to renew confidence in the country's political class and clean up a society dogged by corruption, saying he was "aiming big, just as Pope Francis has told us to do".

Investors appeared buoyed by the new leadership, with Italy performing well at its first market test, paying significantly lower rates to raise 6.0 billion euros at a five- and ten-year bond auction.

However, official figures on Monday showed that business confidence dropped sharply this month.

Mr Letta said the political class must respond to the growing anti-establishment voice, fuelled by anger over politicians' perks at a time of widespread financial difficulties.

The government's first act would be to cut the salaries of ministers who are also members of parliament, and are therefore eligible for two salaries, he said.

The markets reacted favourably to Mr Letta's speech, with Milan stocks up around two per cent.

But increased investor confidence was not enough to change Italy's sovereign debt rating, which stays at "BBB+", the ratings agency Standard & Poor's said Monday.

The formation of the new government "has, in and of itself, no immediate implications for the sovereign ratings", the agency said in a note.

Ratings agency Moody's had on Friday maintained Italy's rating at "Baa2," - two notches above junk grade, with a negative outlook - warning that a continued political stalemate would harm investor confidence.

Italy's debt will rise to 130.4 per cent of gross domestic product this year, while the economy will shrink 1.3 per cent, according to official forecasts.

Mr Letta have to work to keep his own party from imploding after a deeply damaging rebellion last week.

He promised to change a complex electoral law which had led to a two-month political stalemate before the next general election.

With its confidence vote safely won in the lower house, the government is expected to receive a definitive green light when the vote goes to the upper house Senate on Tuesday.

Analysts say the coalition is likely to last long enough to push through key reforms but may be brought down by sparring parties within a year or two.