By Roberto Landucci
ROME (Reuters) - Italian Prime Minister Silvio Berlusconi's main coalition partner said Tuesday the government could fall over plans to raise the retirement age, a day before a deadline to present an urgent economic reform plan to the European Union.
EU leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Berlusconi present firm plans to promote growth and reduce Italy's massive debt in time for a summit meeting in Brussels Wednesday.
An emergency cabinet meeting late Monday ended without agreement after Berlusconi's coalition allies in the Northern League party refused to budge on their opposition to raising the pension age to 67 years from 65 at present.
Tuesday, as leaders from the deeply divided coalition parties held a series of meetings in Rome, League leader Umberto Bossi said the disagreement could bring down the government and force early elections.
"The government is at risk," Bossi told reporters in parliament. "The situation is difficult, very dangerous. This is a dramatic moment," he said.
The League's party newspaper La Padania ran the headline: "Final showdown on Pensions. Today is D-Day. No to a rise in the pension age, the League will not take a step back."
Berlusconi, mired in scandal and facing sliding approval ratings, has survived a series of confidence votes with the help of the League but analysts widely believe he cannot last much longer, with many expecting elections next spring.
Infrastructure Minister Altero Matteoli, a member of Berlusconi's PDL party, said a crisis that could bring down the government was a "hypothesis" but there was still room for discussion.
The threat of a government breakdown comes as Italy takes centre stage in the euro zone crisis, with concerns mounting over its ability to keep from losing control over a 1.8 trillion euro debt pile and putting the entire bloc at risk.
The euro zone's third largest economy relies on intervention by the European Central Bank to keep its borrowing costs at manageable levels. As the government has continued to dither over reform, markets have become increasingly nervous.
Yields on Italian 10-year bonds are just under 6 percent, not far short of levels they reached in August when the ECB stepped in and started buying Italian bonds on the market to keep its borrowing costs at manageable levels.
HUMILIATION
As ministers scrambled to hammer out a deal in time for the Wednesday deadline, Matteoli said there would be no cabinet meeting but that Berlusconi might still have proposals to take to Brussels.
"If there is an agreement, the prime minister will take it to Europe. We can pass the provision later," he said.
Silvano Moffa, a lawmaker in one of the small coalition parties who was present at one of the meetings Tuesday, said Berlusconi would send a letter to Brussels with proposals later in the evening. He also said the Northern League was prepared to discuss changes to pension rules, but he gave no details.
The League, a regional pro-devolution party with a constituency including many small business owners and pensioners, has been firmly opposed to raising the pension age and Bossi has been under pressure from grassroots supporters increasingly disillusioned with Berlusconi.
Berlusconi has reacted angrily to pressure from Germany and France to enact reforms. He issued a statement Monday declaring that no EU country was in a position to give lessons to its partners.
Perceived slights, such as a news conference in Brussels where Merkel and Sarkozy exchanged ironic smiles and laughter following a question about whether they were reassured after meeting Berlusconi, have caused some bitterness in Italy.
Tuesday, President Giorgio Napolitano called on the government to show a credible commitment to reform but said expressions of mistrust at Italy's engagement were "inappropriate and unpleasant."
European Commission spokesman Amadeu Altafaj said the Commission had no intention of humiliating Italy but needed details on its reform plans.
Italy, once seen as safe from the crisis because of a relatively low deficit, a conservative financial system and high private savings, saw its debt come under fire from investors in July.
It has since passed a series of reforms, but has failed to convince markets worried that the deep divisions in the government will stymie painful measures aimed at cutting the debt and boosting the stagnant economy. Over recent weeks, the main ratings agencies have all downgraded Italy.
Underlining the gloomy state of the economy, data Tuesday showed consumer morale in October fell to its lowest level since July 2008.
Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue though steps such as privatisations and a new wealth tax, but the measures have been repeatedly delayed.
(Additional reporting by Giselda Vagnoni and Alberto Sisto; Writing by James Mackenzie; Editing by Peter Graff)
