UPDATE 3-Italy's Monti faces vital test on labour reform
* Monti presses unions for deal to loosen job protection rules
* Says deadline for reform is end-month
* Government wants backing to reform two-tier labour market
* Key hurdle is symbolic article 18 in labour statute
By Steve Scherer and Francesca Piscioneri
ROME, March 20 (Reuters) - Prime Minister Mario Monti began a final push on Tuesday to forge a deal with trade unions on labour reform that marks a crucial test of his ability to revive Italy's chronically uncompetitive economy.
The former European Commissioner opened informal discussions ahead of a meeting at 1500 GMT to try to agree on how to ease stringent legal protection for workers that dates back to the 1970s high-water mark of trade union power.
The rules, which protect workers in larger companies from being sacked, have been fiercely defended by labour leaders but are also blamed for Italy's painfully low employment rate and years of stagnant growth.
A deal on labour reforms will determine whether Monti can push through the kind of far-reaching changes to the economy needed to restore growth and reduce Italy's crippling burden of public debt.
Monti met the leaders of the leftwing CGIL union confederation as well as the more moderate CISL and UIL, while Labour Minister Elsa Fornero held separate talks at a technical level on welfare measures and job contracts.
The technocrat government is aiming for a deal by the end of the week, but has pledged to defy the unions and push the reforms through parliament if they cannot reach agreement.
Appointed in November as financial market turmoil threatened to suck Italy into a Greek-style debt crisis, Monti has already moved to shore up public finances through a mix of spending cuts, tax hikes and a major overhaul of the pension system.
Late on Monday, influential President Giorgio Napolitano called on unions and employers to reach a deal in the interests of the country.
Failure to persuade union leaders, who fear they may have already given too much away in an atmosphere of national emergency, could unleash strikes and dissent within the grand coalition of parties supporting Monti in parliament.
The labour rules have been blamed for creating a two-tier system familiar across southern Europe, where older staff monopolise protected positions and the young are either left unemployed or stranded in precarious short-term contracts.
"We're running the last mile," said Corrado Passera, the banker Monti brought into government in November as industry minister. "An agreement is within reach," he told reporters in remarks that are at odds with signals coming from some unions.
TWO-TIER LABOUR MARKET
The standoff between the government and unions has focused on Article 18 of the labour law, a provision which makes it difficult to fire workers in companies with more than 15 employees for all but the grossest of misconduct.
Monti has conceded that the rules will not change for workers already in employment, but wants to create a different system for new hires.
The three main confederations, which represent a substantial part of Italy's 12 million-strong union membership, are divided. The CGIL, the largest group, is taking a harder line than the more moderate CSIL and UIL.
"An agreement is very possible," UIL leader Luigi Angeletti said on Monday, although he stuck to his demand that the government drop proposed changes which would let employers sack workers for under-performance.
In a sign of the kind of resistance Monti is facing, the metal-workers arm of the CGIL called its members to down tools for two hours of their own choosing during Tuesday in protest against the proposed changes.
The discussions are being watched closely by financial markets, which have been reassured by Monti's first months in government, but remain nervous about growth prospects in the troubled euro zone.
More than 30 percent of 18- to 24-year olds in Italy are unemployed, and only about 57 percent of Italians have a job, giving the country one of the lowest employment rates in the euro zone. It also has some of the slowest growth on the continent.
Monti must bolster growth if he is to convince markets that Italy can pay off its huge debt, which amounts to around 120 percent of gross domestic product.
Italy's benchmark bond yield has fallen to below 5 percent from highs of close to 8 percent near the end of last year. But investors may start changing their view if Monti fails to pull off the labour reforms he has promised.