MILAN, April 25 (Reuters) - Fitch Ratings on Friday affirmed Italy's sovereign rating at 'BBB+' but raised its outlook to stable, saying a deep recession in the country had ended and funding conditions had improved markedly.
The rating agency also mentioned recapitalisation efforts at Italian banks, which are planning to raise about 10 billion euros in total from investors and are less likely to require public assistance than in the past.
Italy emerged from its worst post-war recession late last year. Its borrowing costs have declined sharply this year as investors bet on economic recovery in the countries worst hit by the debt crisis, encouraged by the ultra-loose monetary policy of the European Central Bank.
However, still-high unemployment weighs on internal consumption and the inability to push through much-needed structural reforms keeps its growth potential low.
Fitch expects Italian public debt to peak at 135 percent of output this year and remain above 130 percent until 2017, limiting the country's ability to respond to potential shocks.
Fitch said this and Italy's weak growth prospects were among key factors behind the current rating level.
Fitch cut Italy's rating to 'BBB+' in March last year, following inconclusive parliamentary elections.
A two-month political stalemate ended in late April when centre-left politician Enrico Letta was appointed prime minister to lead an unwieldy coalition of former rivals.
Letta was ousted this year by party rival Matteo Renzi, 39, who in February became Italy's youngest-ever leader.
Fitch warned that fresh political paralysis could hurt the rating.
On the other hand, a stronger-than-expected economic recovery or growing expectations that public debt can decline in relation to output could trigger a rating upgrade. (Reporting by Valentina Za; Editing by Kim Coghill)