* Berlusconi party secretary calls on group to backgovernment
* Letta assessing support before calling confidence vote
* Financial markets, international partners watching closely
* PDL source says about 30 PDL senators willing to supportLetta
By Giselda Vagnoni
ROME, Oct 1 (Reuters) - Senior party figures in SilvioBerlusconi's fractious centre-right movement urged Italianlawmakers on Tuesday to defy the billionaire media tycoon andback Prime Minister Enrico Letta in a confidence motion expectedon Wednesday.
Berlusconi's People of Freedom (PDL) party has come close tobreaking apart after he pulled his ministers out of the rulingcoalition at the weekend and called for new elections followinggrowing tension over his conviction for tax fraud.
Divisions between hardline "hawks" and more moderate "doves"have widened sharply as opposition has grown to Berlusconi'scall to bring down Letta's coalition, five months after it wasformed in the wake of deadlocked elections in February.
Italy, the euro zone's third-largest economy, has been inpolitical turmoil for the past week, and even if Letta'sgovernment survives the vote, there is no certainty that hisadministration will be strong enough to enact effective reformsto confront its longest postwar recession.
However, the breakdown of unity in Berlusconi's party is awatershed moment for the man who has been the undisputed leaderof Italy's centre right for two decades and opens anunpredictable new chapter in Italian politics.
Party secretary and Interior Minister Angelino Alfano andTransport Minister Maurizio Lupi, who handed in theirresignations on Berlusconi's orders on Saturday, called on theparty to back Letta in the vote expected in the Senate onWednesday.
"I remain firmly convinced that our entire party shouldsupport Letta in a confidence vote," Alfano told reporters.
Letta rejected the resignations of Alfano and Lupi and thethree other PDL ministers on Tuesday, a signal that he valuedtheir public backing.
Berlusconi appeared to confirm an impending party split whenhe decided, after a meeting with his advisers, that he will askhis lawmakers to withdraw their support for Letta on Wednesday,Alessandro Sallusti, editor-in-chief of the party newspaper,said on RAI state TV.
Sources in Letta's centre-left Democratic Party said he hadnot yet decided whether to call a formal vote of confidence inparliament on Wednesday and was waiting to see what emerged froma frantic round of meetings on Tuesday.
If it does not appear that he has enough support from PDLrebels, he would hand in his resignation to President GiorgioNapolitano before a confidence vote. He could then bere-appointed to try to form a new coalition in parliament,setting off a new round of negotiations.
Letta's Democratic Party (PD) has a strong majority in thelower house, but in the Senate he would need to win support fromthe PDL or others such as the anti-establishment 5-StarMovement, which has said it will vote against the government.
The parliamentary arithmetic is complicated and deceptive,but to be sure of winning, Letta, who can count on 138 votesfrom the PD and centrist parties, would need at least 20 morevotes for a majority in the 315 seat Senate.
About 30 PDL senators are willing to continue supportingLetta, one PDL source said.
However, the premier has made it clear that scraping througha confidence motion with a handful of votes will not be enoughto be able to implement reforms and control public finances.
PDL moderates have called for a new direction in thecentre-right and the removal of the ultra-hardliners who havegained increasing influence over Berlusconi in recent weeks.
But it is not clear whether Berlusconi, a billionaire mediatycoon who has dominated the centre-right for 20 years, will beable to persuade potential rebels to return or whether thebreakdown in his party is final.
IMPACT "FELT THROUGHOUT EUROPE"
As the countdown to the vote began, official figures showedyouth unemployment had hit a record of 40.1 percent in August,underlining the dire state of the Italian economy, now in itssecond year of recession.
President Giorgio Napolitano said in a statement that Lettawould seek backing for a "stable commitment for continuinggovernment action from the most immediate deadlines toobjectives to be pursued in 2014".
Even if Letta survives a confidence vote, he may not haveenough support to pass the kind of deep reforms or painful taxand budget measures needed to reverse a decade of economicstagnation and cut its 2 trillion euro public debt.
But with memories still fresh of the chaos that brought theeurozone to the brink of collapse when the last Berlusconigovernment fell in 2011, the turmoil in Italy has been closelywatched by Rome's international partners.
"The impact of what happens in Italy does not end at thecountry's borders. It is felt throughout Europe," EuropeanMonetary Affairs Commissioner Olli Rehn told reporters in Paris.
Financial markets have also watched closely, and Italy'sborrowing costs have risen markedly, though with the EuropeanCentral Bank pledging to support euro zone bonds, there has beenno sign of the panic seen at earlier crisis points.
The main barometer of market concern, the premium investorsdemand to hold Italian 10-year government bonds over AAA-ratedGerman Bunds has actually fallen from more than 300 basis pointsat the start of the week to 266 points on Tuesday.
"In the end if Letta is able to get a short-term agreement,if he is able to postpone elections for a few months, then thatis a positive result for him and there would be a positivereaction by the markets," said Leonardo Morlino, professor ofpolitical science at LUISS University in Rome.
Letta's unwieldy coalition of left and right has struggledever since it was formed in the wake of last February'sdeadlocked elections, which left no party able to govern alone.
With Italy's complicated voting system widely expected toproduce another stalemate if snap elections were held now,Napolitano has repeatedly said he does not want to dissolveparliament and call a new ballot.
- Politics & Government
- Enrico Letta