Berlusconi allies step up threats over Italian Senate ruling

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, resumes talks at 8.00 p.m. (1800 GMT) after an initial meeting on Monday.

The billionaire former prime minister's People of Freedom party (PDL) accused its coalition partners in the center-left Democratic Party (PD) of "an act of war" by insisting on going ahead swiftly with the hearings.

"We are appalled by the attitude of the Democratic Party," PDL secretary Angelino Alfano said in a Facebook post. "They prefer to bring the country to its knees just to eliminate their historic political enemy via judicial means."

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 PDL members proposing an immediate delay until an appeal to the European Court of Human Rights can be heard.

The PD, which has the largest number of members on the 23-member committee, accused the center right of delaying tactics and intends to vote down three motions to delay the hearings.

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.

Renato Brunetta, floor leader of the PDL in the lower house, said that if the left and the anti-establishment 5-Star Movement maintained their opposition, the fragile coalition formed after February's deadlocked parliamentary elections would fall apart.

"If the Democratic Party and Grillo's people decide this evening to vote against the proposals, the Democratic Party will bring down the Letta government," he told RAI state radio.

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

Berlusconi, who has maintained a low public profile for more than a month, is due to meet PDL lawmakers on Wednesday.

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.

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.

Bank of Italy Governor Ignazio Visco said the decline in output should end in the next few months but he warned that the any recovery could be at risk from the political instability.

However, despite a chorus of warnings from bodies ranging from the European Commission to the International Monetary Fund that Italy cannot afford political chaos, parliament has been absorbed for weeks in the details of Berlusconi's legal woes.

The center right maintains that Berlusconi is the victim of leftist magistrates and says the so-called "Severino law" under which he could be expelled from the Senate cannot apply in his case because it was only passed last year, after the events over which he was convicted.

His appeal to the European Court of Human Rights is aimed at having the law declared inapplicable but it would be several months before the court would be ready to reach any decision.

(Additional reporting by Paolo Biondi; Editing by Robin Pomeroy)