By Jan Harvey

VICENZA (Reuters) - Italian jewellers are focusing on high-end design and innovation to fight off competition from mass-market manufacturers and see China as a key source of customers, according to the World Gold Council.

Speaking on the sidelines of the Fiera di Vicenza trade fair, the WGC's Italian representative Daniela Invernizzi said with jewellers facing stiff competition over mass-market products like machine-made chains, they are becoming increasingly innovative in a bid to compete.

"Italy lost the mass market," she told Reuters. "It cannot compete in the mass market any longer because of competitors like Turkey, like China, India. (But) Italy is ahead on design."

Jewellers were now looking to new technologies to drive the production of high-end products, she said.

"The companies are using laser engraving, they are developing other technologies," she said. "They are reducing in size, (and) they are positioning themselves as the most creative workshops in the world."

With much of the world still suffering from the economic downturn, Invernizzi said China could be a key destination for exports next year.

"China is always very interested in Italian products," she said. "They have a good manufacturing base in China, but for especially difficult design they buy from Italy - Hong Kong buys from Italy."

TOUGH YEAR

Italy had a tough year in 2009 as record gold prices and the impact of recession weighed on global jewellery demand. Metals consultancy GFMS estimated on Wednesday 13 January that Italian gold jewellery production fell 23 percent.

Italy is Europe's largest exporter of gold jewellery.

The downturn has prompted talk of consolidation in the Italian jewellery sector.

A manager at Italian jeweller Rosato said last week his company would join forces with Calgaro to take advantage of recovery after the global crisis, in what is likely to be the first major merger in the Italian sector.

Invernizzi said Italian jewellers had streamlined their working practices last year to position themselves for recovery.

"The role of Italy has probably changed from 20 years ago when they were the largest exporter of gold jewellery in the entire world," she said. "They dictate the trends for the future."

Some areas of work were starting to pick up, and Italian jewellers were beginning to report that while buyers remain cautious, the worst may be over, she said.

She noted that jewellers were reporting design work from high-end fashion houses, for example, was increasing.

The World Gold Council is a gold marketing body funded by mining companies.

(Reporting by Jan Harvey; Editing by Erica Billingham)