European stocks extended gains Wednesday, while government bond yields eased and the single currency firmed, after European Commission officials confirmed a budget deal with Italy that will allow the region's third largest economy to avoid censure for overspending.

Italy's 2019 budget deficit will be pegged at just over 2% of GDP, European Commission Vice President Valdis Dombrovskis said, but noted the populist government's spending plans still "raise concerns" and urged it to begin reduction its €2.3 trillion debt pile as soon as possible.

"The solution on the table is not ideal," Dombrovskis told reporters in Brussels Wednesday. "It does not yet deliver a long-term solution to Italy's economic problems. But it allows us to avoid an excessive deficit procedure at this stage."

Italy's benchmark 2-year government bond yields were marked 11 basis points lower at 0.454%, the lowest since May, while the extra yield, or spread, that investors demand to hold benchmark 10-year paper instead of triple-A rated German bunds narrowing to around 2.59%, the lowest since late September.

The FTSE MIB, Italy's main equity market index, led European markets higher with a 1.65% gain on the session, helping the broader Stoxx 600 to rise 0.36% by mid-day in Frankfurt. The euro was also firmer, rising to 1.1401 against the U.S. dollar. 

The European Commission had said Italy's near-term budget plans, which first anticipated a 2.4% deficit and billions in new spending, were an "unprecedented" violation of EU rules and urged the government to revisit certain campaign promises in order to put the country's finances, which include a debt-to-GDP ratio of 132%, on a firmer footing.

Last month, Italy's parliamentary watchdog warned the government's spending plans would would lift the deficit to 2.6% of GDP next year, not the 2.4% forecast by the coalition of Matteo Salvini and Luigi Di Maio, as the economy weakened alongside a broader Eurozone slowdown.

Reports of a rift between Deputy Prime Ministers Matteo Salvini, who leads the right wing Liga Movement, and Luigi Di Maio, head of the leftist Five Start Movement party, over a budget clause that would accept a small "amnesty" settlement from businesses, as it traditional in Italian politics, in lieu of the full payment of back taxes, had also raised the prospect of a government collapse that would trigger fresh national elections.

Italy's current coalition government, a collection of far-left and far right anti-European political movements, is ostensibly led by Prime Minister Giuseppe  Conte, but is more practically dictated by Di Maio and Salvini.

Despite their stark political differences, both men have found common cause -- and domestic popularity -- in their mutual distaste for the European Union and its perceived control over Italy's internal finances and the pair have attempted to build public support with a deficit busting budget that would fund social welfare projects and deliver broad tax cuts.