Italy keeps Europe on tenterhooks over reform

ROME (Reuters) - Italy goes to the European Union on Wednesday with an offer of economic reforms, drafted in haste by two disagreeing coalition parties, that appears to fall short of a main EU demand.

Prime Minister Silvio Berlusconi was holed up with aides and coalition leaders in his Rome residence on Tuesday night drafting a "letter of intent" to the EU on what Italy would do to enact economic reforms demanded by its EU partners as a condition for buying its bonds.

The euro zone's number three economy is at the center of the storm, needing to issue some 600 billion euros in bonds in the next three years to refinance maturing debt.

Umberto Bossi, leader of the Northern League, whose support is vital to Berlusconi, said the coalition had reached agreement on reforms but that it was up to the EU to decide if they were enough. "In the end we have found a way. Now we will see what the EU says," Bossi told reporters.

But Bossi said he was still pessimistic about the survival of the coalition government and that his party would not budge on opposing a higher retirement age on some types of pensions.

EU nations say the retirement age must rise in Italy, which has a public debt of 1.8 trillion euros, equal to 120 percent of GDP.

The opposition said Berlusconi was bringing about "the Italian disaster" and repeated calls for him to step down.

EU leaders, particularly German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Italy present firm plans to promote economic growth and reduce Rome's massive debt.

Bossi, who earlier had said the disagreement on pensions could bring down the government and force early elections, gave no details on the reforms that would be presented to Brussels.

The possibility that Italy could lose control over its debt pile and put the entire euro zone at risk has spooked financial markets. The three main credit ratings agencies have all downgraded Italy.

Italy relies on intervention by the European Central Bank to keep its borrowing costs at manageable levels. It has passed a series of reforms, but has failed to convince markets worried that the divisions in the government will stymie painful measures aimed at cutting the debt and boosting the stagnant economy.

Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue through steps such as privatizations and a new wealth tax, but the measures have been repeatedly delayed.

Berlusconi has reacted angrily to pressure from Germany and France to enact reforms. He issued a statement on Monday declaring that no EU country was in a position to give lessons to its partners.

(Editing by David Stamp)