As market pressure on Italian bonds intensified, Prime Minister Silvio Berlusconi's centre-right government yielded to demands to strengthen measures intended to balance the budget by 2013.
The 20% VAT bracket will be raised by one percentage point to 21% and a special 3% levy will be imposed on incomes of over €500,000, a statement from Berlusconi's office said.
It also said ministers would approve the introduction into the constitution of a "golden rule" on balanced budgets and transfer provincial government functions to the regions in a move to simplify local administrations.
Other changes would delay retirement for women employed in the private sector from 2014.
A confidence vote will be called which should see the package passed in the Senate on Wednesday, offering some reassurance ahead of Thursday's meeting of the European Central Bank governing council, which has been pushing Rome for action.
Approval in the lower house would then be needed for the package to be passed.
The European Commission said on Tuesday that it supported the additional austerity measures unveiled by the Italian government, and called for their swift adoption.
"[The measures] confirm the determination of the Italian authorities to meet the agreed targets of deficit and debt reduction, while contributing to tackle the deep-rooted structural weaknesses of the Italian economy," the EU executive said in a statement.
"The confirmation of the decision to introduce in the constitution the principle of a balanced budget and the abolition of provinces are decisive improvements in the institutional framework of Italy, and contribute to ensure budgetary discipline on a permanent basis," the statement said.
The Commission singled out the steps taken on the retirement age as an important signal, and called for rapid adoption of the adjustment package.
… while Italians take to streets
As the government scrambled to make last-minute changes to the package, protestors held rallies in around 100 towns and cities as part of a strike against the cuts called by Italy's largest union, the CGIL.
Protests in Italy have not matched the 'indignados' demonstrations in Spain or the mass rallies in Syntagma Square in Athens, but Tuesday's strike released simmering anger at the burdens imposed on ordinary Italians by more than a decade of economic stagnation.
"It's wrong to target people like me. I am on the poverty line. I only make €1,000 a month," said Marco Vacca, a 49-year-old employee of an industrial laundry who joined a rally of thousands outside Rome's central rail terminal.
The CGIL, which has not been joined by more moderate unions, said about 58% of workers were on strike in sectors affected by the stoppage, roughly in line with other big protests this year.
It remains to be seen whether the new austerity measures will survive parliamentary approval.
Berlusconi's government, which until recently boasted of keeping Italy out of the crisis, has struggled to build up a defence against market pressure and is hampered by deep divisions in its own ranks over tax and pension issues.
Measures ranging from a tax on high earners, retirement delays for some university graduates, cuts to local government funding or the abolition of small town councils have been proposed and then dropped with bewildering haste.
EurActiv with Reuters