UPDATE 1-Euro zone rescue fund sees no cause for panic on Italy but warns of bank woes

Klaus Regling stressed that Italy's debt problems were different from those of Greece, which needed three eurozone bailouts over the last decade.

The head of the euro zone's rescue fund said on Tuesday Italy's free-spending fiscal plans were a reason for concern, but added there was no cause for panic as contagion to other European countries had so far been "very limited".

"We are worried about Italy," Klaus Regling told a news conference, saying that the Italian government's fiscal plans were a risk.

But he stressed that Italy's debt problems were different from those of Greece, which needed three eurozone bailouts over the last decade.

He warned of growing problems faced by Italian banks due to higher yields on Italy's debt but underlined the country's banking woes were different from those experienced by Spanish lenders when Spain asked the European Stability Mechanism rescue fund a bailout in 2012.

"In Italy itself there is contagion to the banking sector" because of the falling value of Italy's debt held by lenders, Regling said, adding that this has been reflected in banking funding costs.

He added that "one or two" Greek banks had also partly suffered from contagion from Italy, but said problems at these banks, which he did not name, were also caused by very high levels of bad debt.

(With inputs from agencies.)