Italian government in crisis as PM Letta fights calls to go

ROME - Italian Prime Minister Enrico Letta faces a showdown with his own centre-left party on Thursday that could lead to his resignation and the appointment of Democratic Party leader Matteo Renzi as head of a new government within days.

Letta, a low-key moderate appointed to lead the cross-party coalition patched together after last year's deadlocked elections, is fighting for his political future after growing criticism over the slow pace of economic reform.

A meeting of the 140-strong leadership committee of the Democratic Party at 3 p.m. (1400 GMT) will decide whether he has the backing of his party to continue, or will be forced to stand aside less than a year after taking office.

On Wednesday, he defied Renzi to challenge him openly, and as the meeting approached, he rejected approaches from PD officials to go quietly, though the party denied rumours that he had been offered the economy ministry portfolio.

The latest bout of turmoil in Italy, the euro zone's third-largest economy, has so far had little impact on financial markets, in contrast with the volatility seen during previous crises, such as the stalemate after last year's election.

However, the continual uncertainty has held back any concerted effort to revive an economy struggling to emerge from its worst slump since World War Two or overhaul a political system blamed for hampering any deep reform programme.

If Renzi succeeds in ousting Letta, as most media and political commentators expect, he would be Italy's third unelected prime minister in succession after the technocrat Mario Monti and Letta, who was named as premier after weeks of fruitless wrangling between rival parties.

Having burst onto the political scene promising renewal and a break with the Byzantine traditions of Italian politics, Renzi could now gain power in a backroom manoeuvre reminiscent of the revolving door Christian Democrat governments of the past.

An ambitious 39-year-old whose main experience of government has been as mayor of Florence, he is not a member of parliament and has never stood in a national election but has always said that he only wanted to become prime minister with a clear mandate from voters.

That option appears to be off the table after President Giorgio Napolitano made it clear that he did not want to call a new election until the voting law blamed for the last stalemate has been changed.

"This is a very dangerous operation by Renzi both for the country and for himself," Giovanni Toti, political adviser to former centre-right Prime Minister Silvio Berlusconi, told RAI state television.

"He was supposed to be the outsider who was going to renew the PD. Now, as soon as he gets close to power, he's behaving exactly like all the others," he said.

Tensions have been brewing ever since Renzi's overwhelming victory in a party leadership primary in December, but the pressure on Letta has suddenly intensified this week as powerful lobbies including the main industry association Confindustria have joined calls for faster action on reforms.

On Thursday, Angelino Alfano, head of the New Centre Right party that supports the ruling coalition, said Letta could count on a "loyal, correct and fruitful alliance" as long as he retained the backing of the PD.

But he left it open whether he would continue to support the government if Letta were forced to step down in favour of Renzi, who has backed a number of policies unacceptable to the centre-right, including support for gay civil unions.

"We're not taking anything for granted, and we will consider this possibility once it is confirmed," he told Canale 5 television. If the centre-right withdraws support, Renzi, who is viewed with deep scepticism by the left of his party, may seek the support of the small Left Ecology Freedom party.

Italian media have also speculated that he may be able to attract some defectors from the anti-establishment 5-Star Movement, but it remains unclear how stable such support would be in the testing parliamentary battles needed to pass any wide-ranging reforms.

His accord with Berlusconi to overhaul the much-criticised electoral law, a measure touted by all sides as a necessary step to creating stable government, has already encountered delays in parliament as scores of amendments have been tabled.

In a sign that markets have taken the turmoil in their stride, however, an auction of medium and long-term bonds on Thursday saw investors snap up the maximum amount of paper on offer, with yields on three-year bonds at their lowest level since the launch of the euro.