Just this month alone, Italian 10-year bond yields have soared almost 100 basis points (bps). Spanish, Portuguese and Greek bond yields have jumped around 80 bps each, hurt by expectations for a series of rate hikes and the absence of a concrete plan from policymakers to limit rising borrowing costs.

For now, signs of an ECB plan taking shape bolstered bond markets which had already rallied on news that a rare, unscheduled meeting would take place on Wednesday.

"Flexible PEPP reinvestments now, and tasking the relevant committees to design a new anti-fragmentation tool That's what markets needed to hear, finally!," Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, tweeted.

Italy's 10-year bond yield was last down 30 basis points on the day at 3.92% and set for its biggest one-day fall since March 2020.

Greek 10-year bond yields slid 35 bps to 4.308% and Spanish and Portuguese 10-year yields slid around 20 bps each. .

Germany's 10-year yield, the benchmark for the bloc was last down 12 bps 1.67%.

The euro meanwhile trimmed gains and was last flat on the day at $1.0410. It was up 0.3% before the statement.

Euro zone shares rallied and were last up 1.4%.

Italian bank stocks reduced gains and were last up 4%, having risen as much as 6.6% in morning trade. Euro zone banks also trimmed gains.

"Last week we only heard one side of the story from the ECB about what they will do on rate hikes, but not what they would do about fragmentation risks. Obviously they are now trying to rectify this," said Marchel Alexandrovich, European economist at Saltmarsh Economics.

Focus meanwhile was expected to turn later in the session to the U.S. Federal Reserve, which could deliver a hefty 75 basis point interest rate hike to tame inflation.

(Reporting by the London Markets Team; editing by Saikat Chatterjee)

By Dhara Ranasinghe