Italian lawmakers seek to head off showdown over Berlusconi

By Roberto Landucci

ROME (Reuters) - Italian lawmakers sought to head off a showdown on Tuesday over the political future of Silvio Berlusconi after allies of the billionaire media tycoon threatened to bring down Prime Minister Enrico Letta's unstable ruling coalition.

A cross-party Senate committee, which is deciding whether Berlusconi should be barred from the upper house following a conviction for tax fraud last month, was due to resume talks at 8.00 p.m. (1800 GMT) after an initial meeting on Monday.

Berlusconi's center-right People of Freedom (PDL) party has sought to delay the hearings pending an appeal to the European Court of Human Rights but has been rebuffed by the center-left which says the appeal is no more than a delaying tactic.

Following a tense day in which center-right leaders threatened to pull out of Letta's coalition, potentially triggering snap elections, there were signs that members of the cross-party panel may avert a confrontation.

The center-left Democratic Party (PD), which has the largest number of members on the 23-member committee, has said it will vote down three motions that would delay the hearings but the committee may delay a vote to win more time, according to two sources close to the committee.

"There won't be a vote tonight," one parliamentarian, who spoke on condition of anonymity, told Reuters. "The chairman of the panel is working to head off a vote."

Whether the threats go beyond simple brinkmanship remains unclear but the wrangling around the hearings has underlined how entwined Italy's political stability remains with the personal fate of Berlusconi, 20 years after he first entered politics.

Even before the committee meeting had properly begun, arguments broke out between the main partners in center-left Prime Minister Enrico Letta's cross-party coalition with each side accusing the other of creating a crisis.

"We are appalled by the attitude of the Democratic Party," PDL secretary Angelino Alfano said in a Facebook post.

With Italy straining to contain its 2 trillion euro public debt, the Berlusconi imbroglio has also hobbled efforts to reform the euro zone's third largest economy, causing worries that extend well beyond its own borders.

Berlusconi, convicted by Italy's top court last month of being at the center of a vast tax fraud conspiracy at his Mediaset television empire, could not be expelled without a full vote on the floor of the upper house.

But he in any case faces banishment from front-line politics for at least a year after the court sentenced him to a four-year jail term that was then commuted to one year under house arrest or in community service.

BOND MARKET NERVES

Whether a government crisis would necessarily lead to new elections is unclear, given President Giorgio Napolitano's reluctance to send Italy back to the polls.

If the PDL makes good on its threat, Napolitano could try to oversee the creation of a new government formed around the PD with the support of dissidents from the center right or 5-Star party.

Berlusconi's own party remains divided between hawks pressing for a showdown with the PD and more moderate elements and executives from his business empire who fear that the party risks isolating itself with no guaranteed payoff.

"The people from Berlusconi's business are telling him that bringing the government down and causing new elections would be a big blow for them," one PDL lawmaker on the party's moderate wing told Reuters.

With the European Central Bank pledging to step in to prevent bond market turmoil of the kind which threatened Italy at the height of the euro zone debt crisis in 2011, financial markets have shown no signs of panic.

But Italy's borrowing costs have crept up over the past few weeks and an auction of mid-term bonds on Thursday will be closely watched for any signs of investor nerves.

On Tuesday, Spanish government bond yields fell below Italy's for the first time in 18 months as worries over the political standoff hit sentiment.

Although there have been faint signs of improvement after some two years of recession, data on Tuesday showed the economy still far from recovery.

(Additional reporting by Paolo Biondi; Editing by Ralph Boulton)

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