Italy PM Letta in showdown with party boss Renzi

ROME (Reuters) - Italian Prime Minister Enrico Letta failed to resolve differences with centre-left leader Matteo Renzi on Wednesday after a showdown that could lead to a change of government within days.

The two met in Letta's office in Palazzo Chigi a day before a meeting of the 140-strong leadership group of the centre-left Democratic Party (PD) that is due to decide whether the largest party in the coalition will continue to support the prime minister.

Days of repeated criticism by Renzi of the Letta government's failure to pass significant economic reforms have raised expectations that the prime minister will stand aside.

However Letta has resisted calls to go and after a meeting that lasted more than an hour, there was no sign of a change in the position of either, according to a source in the prime minister's office.

Letta, a low-profile moderate appointed in April to lead a government patched together after last year's deadlocked election, has kept his unwieldy coalition together but has struggled to pull Italy out of its worst postwar recession.

He promised to unveil a package of measures on Wednesday and his office confirmed that he would hold a news conference in the afternoon.

Renzi's victory in a PD leadership primary in December has shaken up politics in Italy and complicated the position of Letta, who is from the same party.

"The political situation is really complicated. You'd need Doctor House to understand what's going on in the PD," Health Minister Beatrice Lorenzin told RAI state radio on Wednesday, referring to the brilliant diagnostician in a television drama.

The latest ructions in Italy, the euro zone's third largest economy, have so far left financial markets unperturbed with the risk premium on Italian 10 year bonds over safer German Bunds below 200 basis points, comparable with levels seen before its bonds were sucked deep into the euro zone debt crisis in 2011.

But the continual uncertainty has held back any radical effort to revive an economy that has shrunk by more than 9 percent since 2007, sending unemployment to levels not seen since the 1970s.

Renzi, an ambitious and fast-talking 39-year-old whose main experience of government has been as mayor of Florence, has said repeatedly that if the coalition cannot get things done it would be better to hold new elections.

However, until the electoral law that produced last year's stalemate is changed, any new vote would almost certainly produce another impasse.

Opinion polls suggest that Italian voters do not want a change of premier without elections, with a survey in Wednesday's La Stampa suggesting that no more than 14 percent wanted to see Renzi taking over before a new vote.

ECONOMY

In keeping with his image as a dynamic moderniser impatient with the rituals of old-style politics, Renzi arrived for his meeting with Letta at the wheel of a blue Smart car.

But the speculation of a handover is reminiscent of the short-lived revolving door governments of the past and underlined the Italian left's long tradition of infighting.

"If this is Renzi's revolutionary new idea of politics then frankly he's a great disappointment," said Mara Carfagna, parliamentary spokeswoman for Silvio Berlusconi's centre-right Forza Italia party.

Whether the small New Centre Right party that supports Letta would be willing to remain in government with the much higher profile Renzi remains to be seen, and Italian newspapers speculated that he may be aiming for a new coalition with the small Left Ecology Freedom party.

"We are evaluating the options," Regional Affairs Minister Graziano Del Rio, a close ally of Renzi told Canale 5 television. "It will depend on the wishes of the political forces that support this government."

A drive by Renzi to reform the electoral law, a measure touted by all sides as a necessary step to creating stable government, has already encountered problems in parliament and disagreement over the scores of amendments that have been filed has pushed a scheduled debate into next week.

To add to the uncertainty, Forza Italia, now in opposition, openly questioned whether the electoral reform proposals agreed between Renzi and Berlusconi would continue if the party secretary also assumed the role of prime minister.

(Additional reporting by Naomi O'Leary; Writing By James Mackenzie; Editing by Ralph Boulton/Ruth Pitchford)