Crisis mounts around Italy's Berlusconi (Reuters)

ROME (Reuters) ? Prime Minister Silvio Berlusconi called an emergency cabinet meeting on Wednesday to accelerate budget reforms, in an attempt to calm market turmoil that threatens to tip Italy's economy into full-blown crisis.

Berlusconi is under growing pressure to step down and hand power to an emergency government of national unity. He held four hours of meetings with senior officials and ministers in the morning ahead of the cabinet meeting at 1900 GMT.

The cabinet will consider various legislative options to fast-track reforms, including a decree and amendments to budget legislation already in the Senate, Infrastructure Minister Altero Matteoli told Reuters.

Berlusconi wants something concrete to show when he goes to the G20 meeting of economic powers in France on Thursday. Italian bonds have been targeted on financial markets as the euro zone financial crisis spreads out from Greece.

Yields on 10-year Italian BTP bonds fell slightly on Wednesday from the highs reached on Tuesday but were still at more than 6.2 percent, even with support from the European Central Bank's bond-buying operation.

Greece's surprise decision to call a referendum on austerity measures demanded by the European Union has worsened fears about the stability of other heavily indebted economies like Italy, the euro zone's third largest economy.

As market turbulence spread, threatening a wider euro zone meltdown, the scandal-plagued Berlusconi has come under fire from all sides over his handling of the crisis and his failure to pass decisive reforms.

"It's useless to make sacrifices to get out of the crisis if Silvio Berlusconi remains at the head of the government," said Pierferdinando Casini, head of the centrist UDC party.

PRESIDENT STEPS IN

In a highly unusual statement late on Tuesday, Italy's head of state, President Giorgio Napolitano called on Berlusconi to pass long-promised measures without delay. Napolitano indicated he was looking at how much support there was for reform outside the ranks of the center-right government.

Napolitano cannot dismiss Berlusconi as long as he has a majority. But if divisions in the coalition deepen and provoke a parliamentary crisis in which the government lose a confidence vote, he would have the power to name a new administration.

"That was a warning," said Anna Chimenti, a professor of constitutional law at the University of Foggia. "Until there is a crisis, Napolitano is like a referee who blows the whistle when rules are not respected. He's blowing the whistle now."

Andrea Ronchi, a PDL deputy who had lunch with Berlusconi on Wednesday, told reporters the 75-year-old prime minister had shown no signs of wanting to stand down.

But there have been growing signs of dissent on his own back benches. Roberto Antonione, a member of Berlusconi's original Forza Italia party, became the latest deputy to quit the ruling PDL and call on the premier to go.

With pressure growing, the opposition Democratic Party said it would try to force a decision in parliament next week if Berlusconi did not resign beforehand.

"We are ready to assume our responsibilities and to support a new government with an agenda for reform and cutting the debt," senior party official Enrico Letta told Reuters in an interview.

REFORMS

Italy is too big to bail out if its borrowing costs get out of control. It has sluggish growth, a divided and ineffective government and a public debt equivalent to 120 percent of gross domestic product -- a toxic combination that poses a growing threat to the survival of the euro.

Berlusconi has promised European Union partners reforms such as easier rules on redundancies, including for civil servants, and an increase in the pension age, but the measures would not take effect for months.

The new Governor of the Bank of Italy, Ignazio Visco, added his voice to the calls for reform, saying the government must rapidly honor its pledges to the EU [ID:nR1E7GD01M]

Officials are trying to pack new measures, including cuts to some tax breaks and more labor market liberalisation, into the budget bill currently in the Senate to enable the government to present an approved package of legislation as soon as possible.

Other potential measures, including a wealth tax and a possible amnesty on tax evasion, have caused deep disagreement between ministers including Berlusconi and Economy Minister Giulio Tremonti.

Underlining the problems facing the government, a purchasing managers indicator on Wednesday hit a 28-month low as Italian manufacturing output fell sharply, highlighting a growing risk of recession in coming months.

A series of austerity packages passed during the summer aimed to bring Italy's budget into balance by 2013, but the government has been widely criticized for the slow and erratic way it has gone about agreeing and implementing the reforms.

The scandals involving Berlusconi, who faces trial on a variety of charges ranging from tax fraud to having sex with an under-aged prostitute, have also raised questions about his focus on the complicated reform process.

(Additional reporting by Paolo Biondi, Gavin Jones, Catherine Hornby, Francesca Piscioneri and Giuseppe Fonte; editing by Barry Moody and Robert Woodward)

Source: http://us.rd.yahoo.com/dailynews/rss/europe/*http%3A//news.yahoo.com/s/nm/20111102/wl_nm/us_italy_crisis

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