Italy says to cut deficit from 2020 after market sell-off

ROME (Reuters) - Italy's populist government may cut its budget deficit targets from 2020 after investors sold off Italian assets and European Union ministers blasted its plans to jack up spending next year, a government source said on Wednesday.

The ruling coalition last week said it planned to run a deficit of 2.4 percent of gross domestic product (GDP) next year, tripling the previous government's target, adding that the deficit would stay at that level through 2021.

While the announcement unnerved markets and prompted criticism from European Commission officials, the executive had been defiant, with 5-Star Movement leader Luigi Di Maio pledging on Tuesday not to backtrack "by a millimetre".

But on Wednesday government sources told Reuters the aim is now to reduce the deficit in 2020 and 2021, to no higher than 2.2 percent of GDP and 2 percent respectively, and possibly lower.

League leader and Deputy Prime Minister Matteo Salvini said in a TV interview that the new plan was to reduce the deficit from 2020, without specifying what the targets would be.

The coalition came to power in June promising to slash taxes and boost welfare spending, and says an expansionary budget next year will boost economic growth and thereby curb Italy's debt - the largest in Europe after Greece at about 131 percent of GDP.

President Sergio Mattarella hopes there will be as little deficit spending as possible but is not trying to dictate numbers to the government, a source close to the president said on Wednesday.

Italian media have reported Mattarella is exerting pressure on the government behind the scenes to keep public finances under control and avoid a head-on collision with the EU.

Prime Minister Giuseppe Conte is due to meet with key ministers to discuss the budget targets for 2019-2021 at around 1100 GMT on Wednesday, a separate government source said.

Italian government bond yields tumbled on the reports of the lower deficit goals, and the euro gained against the dollar.

(Reporting by Giuseppe Fonte, additional reporting by Massimiliano Di Giorgio, writing by Giselda Vagnoni, editing by Steve Scherer and Gavin Jones)