Italy's government has until today to answer the European Commission's doubts over its budget plan.
In a letter to the Commission, Economy Minister Giovanni Tria said he recognised that the budget, which is set to hike next year's deficit to 2.4 percent of gross domestic product (GDP), was not in line with the EU Stability and Growth Pact.
The decision cited "material weakening in Italy's fiscal strength, with the government targeting higher budget deficits for the coming years", as well as debt holding near the current 130 percent of GDP "rather than start trending down as previously expected".
Italy's €2.3 trillion public debt, one of the world's largest, makes the country vulnerable and a potential source of contagion for other euro zone countries.
The European Commission sent Rome a warning letter about the budget last week - the first formal step of a procedure that could lead to Brussels rejecting the package and imposing fines.
"For us, 2.4 percent is the ceiling", Conte said.
Investors have shed €67 billion in Italian bonds since a populist government formed in May, sending the risk premium Italy pays over safer German paper to a 5-1/2 year high of 3.4 percentage points.
The source did not rule out an agreement to lower the deficit goal could be found during a three-week period of negotiations with Brussels that will follow the rejection.
Asked for comment, a Commission spokesman said that the Commission had expressed its "serious concerns" over the draft budget to the Italian authorities, seeking clarifications by noon on Monday to facilitate an assessment.
Late Friday, Italy's debt was downgraded another notch by ratings agency Moody's, but the cut was minor enough that the bonds actually rallied Monday morning.
It has already told Italy that its higher deficit targets were a deviation "unprecedented in the history" of the EU's budget rules.
In a wide-ranging news conference, Conte also stressed that his government, which comprises the right-wing League and anti-establishment 5-Star Movement, had no intention of abandoning either the euro currency or the European Union.
He joined other government members in efforts to dispel concerns about Italy's euro membership. Bloomberg's Kevin Costelloe reports on "Bloomberg Markets: European Open".
Moody's said the planned measures should boost the country's output, but predicted that they would have less impact than the government was predicting.
The ECB declined to comment on Di Maio's remark about conversations with people from the central bank.