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ROME, July 24 (Reuters) - Italian Prime Minister Mario Monti imposed a compulsory plan to restore financial stability to the cash-strapped Sicily region and overhaul its bloated public administration, a government statement said on Tuesday.
The statement, issued after a meeting between Monti and regional governor Raffaele Lombardo, said the leaders had agreed "a plan for financial recovery and reorganisation of the region's public administration, with a binding timeframe and objectives".
The statement stopped short of saying that Sicily would be placed under special administration but made it clear that the programme would be monitored from Rome and that it would insist on cuts to the region's notoriously swollen payroll.
"The programme is to be finalised in the coming weeks and will be formally signed by the regional and national governments," the statement said.
Sicily, which accounts for about 5.5 percent of Italy's gross domestic product, has been at the centre of growing concerns over the financial stability of Italy's regional and city governments after Monti said last week there were serious concerns about the possibility that it could default.
The autonomous island region has some 5.3 billion euros in debt, a long history of waste and mismanagement and an outsized public sector payroll that critics say has been used by successive governments to buy votes.
Officials have since played down fears of an immediate crisis with Interior Minister Annamario Cancellieri saying on Monday that there was no risk either of default or of a special government administrator being appointed.
Worries about Sicily come as Italy itself moves to the forefront of concerns in the euro zone crisis, with the cost of servicing huge debts jumping on contagion fears for the bloc's third biggest economy linked to the worsening plight of Spain.
Following the meeting, Lombardo repeated his own insistence that Sicily had sound and sustainable finances and dismissed talk of default as "rubbish" but confirmed he would resign by the end of the month as previously agreed.
He also said the government had released 240 million euros to help cover funding gaps in the health system, one of the regional administration's key responsibilities.
While the plight of Italy's regional and municipal authorities has not reached the levels seen in Spain, where several regions have been reported to be close to asking for state aid, there have been growing signs of strain from successive cuts to government transfers.
On Tuesday, mayors from around Italy held a demonstration outside the Senate to protest against the cuts which they say will force them to curtail vital local services.
The Corte dei Conti, Italy's top public finance watchdog, has made a damning series of criticisms of the regional administration in Sicily, which has overseen a steady deterioration in the island's finances over the past decade.
With an unemployment rate of 19.5 percent, almost twice the national average, Sicily is among the regions hardest hit by the recession but its public sector payroll has been constantly increased, particularly in the health sector.