Italy's government foresees the budget deficit falling to 2.2 percent of gross domestic product in 2020 and to 2 percent in 2021 from the 2.4 percent expected next year, a government source from the right-wing League party said on Wednesday .
That bought relief to the bond market. It has taken a beating since the coalition - of which the League is a member - said last week it planned to run a deficit of 2.4 percent of GDP over the next three years, tripling the previous target.
Italian bond yields fell six to 19 basis points across the board, after four days of sharp rises .
The 10-year Italian government bond yield fell 10 bps to 3.33 percent. It pulled back from the 4 1/2-year high around 3.46 percent it reached on Tuesday, when comments from a lawmaker about Italy's position in the euro bloc fuelled a selloff.
Wednesday's fall in Italian yields left the gap over benchmark German bond yields, a closely followed indicator of relative country risks, at 290 bps -- down from around 300 bps late Tuesday.
"The deficit forecast news is main reason markets are doing what they are doing today," said KBC rates strategist Mathias van der Jeugt.
"But this is too little to bridge the gap between the EU and Italy. We might get some more relief, but I think it will be short-lived unless Italy comes up with a better proposal that is more aligned with what the EU wants."
EU Commission President Jean-Claude Juncker drew parallels on Monday between Italy's budget plans and the finances of Greece, which only emerged from its third international bailout in August.
Italian Prime Minister Giuseppe Conte is due to meet with ministers to discuss the budget targets for 2019-2021 at around 1100 GMT on Wednesday, a source told Reuters.
The 2020-2021 deficit numbers were first reported by the newspapers Corriere della Sera and La Repubblica, lifting the euro during Asian trade.
The euro was last up 0.3 percent against the dollar. Italian shares rose 1.3 percent, outperforming European stocks overall.
As Italy's bond market rebounded, yields on higher-rated euro zone bonds rose. Germany's 10-year Bund yield was up three bps at 0.46 percent.
"The (Italian) situation remains fluid and mood can make sudden U-turns, depending on a rather unpredictable news flow," analysts at UniCredit said in a note.