Despite a dramatic drop in short-term borrowing costs on Wednesday, the continuing high yields on the benchmark 10-year bonds — just shy of the psychologically important 7 percent rate — pointed to continuing challenges ahead.

Italy, the euro zone’s third-largest economy, must refinance almost 200 billion euros in government debt by April, and if borrowing rates remain high, the country could face a solvency crisis that could threaten the stability of the euro.

At the Thursday sale, the 10-year bond was priced to yield 6.98 percent, down from a euro-era record high of 7.56 at the previous sale in late November. The Italian Treasury also sold bonds due in 2014 to yield 5.62 percent, down from 7.89 percent.

The total of 7 billion euros, or $9 billion, sold Thursday in thin holiday markets was less than the target of 8.5 billion euros.

An auction of 9 billion euros in short-term Treasury bills on Wednesday saw rates fall by half from previous levels. But the sale Thursday was seen as a more significant as a signal of market sentiment about the longer term outlook of Italy’s struggling economy.

Analysts had said that much of the buying on Wednesday came from European banks that had just loaded up on cheap, three-year loans from the European Central Bank, and were looking for easy profit.

Significantly, the 10-year benchmark rate remained close to the 7 percent rate, which economists regard as untenable in the long term.

The auction followed the announcement that Italian business confidence fell to its lowest in two years in December amid imposition of a tough austerity program by the country’s new technocratic government.

The national statistics institute Istat said the manufacturing-sentiment index dropped to 92.5, from a revised 94 in November.

Last week, Mr. Monti won final approval of a $40 billion spending package that includes tax increases and a pension change aimed at eliminating Italy’s budget deficit by 2013. But with Italians starting to feel the pain and dissent growing in Parliament, he must act swiftly to stimulate Italy’s economy, which is already in recession and is expected by some forecasters to shrink in 2012. He was expected to outline new measures at a news conference later Thursday in Rome.

In many ways, the fluctuations in Italy’s borrowing rate only compound the country’s political complexities. Analysts say Mr. Monti’s government needs a certain amount of market pressure to help push through politically unpopular structural changes in the economy that the parties nominally backing him in Parliament are not eager to carry out.

Yet if the market pressure becomes too high and the borrowing rates remain too onerous, Italy risks a default.

“A part of the political class thinks that if the market pressure lets up, we can also lessen the sting of cleaning up the economy, to do weaker economic measures,” Massimo Giannini, the business editor and deputy editor of the center-left daily La Repubblica, said. “But by now I think there’s a broad awareness, at least on the part of the government, that we have to do these measures regardless of the euro and regardless of the commitment we made with Europe.”

In August, Italy agreed to eliminate its budget deficit by 2013 and enact structural changes to its pension system and labor markets in exchange for purchases of Italian government debt by the European Central Bank.

The People of Liberty, the largest party supporting Mr. Monti’s government in Parliament, believes that its former leader, Silvio Berlusconi, was swept out of office by market forces, not traditional democratic processes, and in recent weeks has attempted to gain political ground by capturing Italian discontent at the austerity measures.

“There’s no clear link between the decisions taken by the government and the markets,” Angelino Alfano, the leader of the People of Liberty and Mr. Berlusconi’s political heir, told a group of reporters last week. Calling on Europe to take broader action, he asked: “No matter how illuminated the choices are of the Italian government, can they change the course of the euro crisis or the destiny of Europe?”

In recent weeks, Mr. Monti, too, has been calling on Europe — which is to say Germany, the euro zone’s biggest and strongest economy — to help provide more institutional support for the euro.

Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant. But it has also been vehemently opposed to changes that many economists and the Obama administration say are necessary to ensure the stability of the euro, such as allowing the European Central Bank to become a lender of last resort like the Federal Reserve in the United States.

The troubled backdrop to Italy’s economic challenge is neighboring Greece, where nearly two years of austerity measures — tax increases and wage cuts — demanded by the country’s foreign lenders have pushed the country into a deep recession and led to deep cuts in basic services like health care.

Harvey Morris reported from London.

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