UPDATE 3-Berlusconi party racks up tension with Italy government
* Centre-right walks out of Senate confidence vote
* Berlusconi comeback plan criticised by minister
* Centre-left says if Monti has no majority, parliament should be dissolved
ROME, Dec 6 (Reuters) - Silvio Berlusconi's People of Freedom party withdrew its support for Italy's technocrat Prime Minister Mario Monti on Thursday, setting up a conflict that could force an early election.
The People of Freedom (PDL) walked out of a Senate confidence vote on a package of economic measures and said it would abstain in a separate confidence vote in the lower house later in the afternoon after criticism of Berlusconi from a senior government minister.
Although the symbolic moves did not directly threaten the survival of Monti's government, formed to help Italy avert a bailout, the centre-left Democratic Party (PD) indicated it would ask President Giorgio Napolitano to dissolve parliament if Monti could not be sure of the backing of the centre-right PDL.
"We think that if the PDL confirms this position, the head of state will find the right ways and forms to manage this incident in the most orderly form possible for the good of the country," PD leader Pier Luigi Bersani told reporters.
The conflict underlined the deep uncertainty in Italian politics before an election expected early next year, weakening Italian bond prices.
In an increasingly fevered pre-election atmosphere, Berlusconi dropped a strong hint late on Wednesday that he could go back on previous statements and run for a fifth term as prime minister in the election.
In a television interview early on Thursday, Industry Minister Corrado Passera expressed strong reservations about a return by the 76-year-old billionaire, who left office in a cloud of scandal last year as investors despaired of him resolving the country's economic crisis.
"Anything which can make the rest of the world or our partners imagine that we are turning back is not a good thing for Italy," Passera told state broadcaster RAI.
The premium investors demand to hold Italian 10-year BTP bonds rather than lower-risk German Bunds widened to 324 basis points, having fallen below 300 points earlier in the week.
The stand-off deepens the confusion surrounding the election, which has been expected to take place in March and threatens to open a severe political crisis in the euro zone's third largest economy.
The government easily won the Senate vote by 127 to 17 votes with 23 abstentions but the result made it clear that Monti could not rely on a majority.
Monti, widely credited with restoring Italy's international credibility since he replaced Berlusconi last year, relies on the support of both the PDL and the PD in parliament, but the alliance has frequently been fractious.
In his statement on Wednesday, Berlusconi accused Monti's government of dragging Italy into an "endless recessive spiral" with its austerity policies.
Passera retorted that most of Italy's deep economic problems were the result of a decade of poor management.
Berlusconi, who was in power for most of the past 10 years, has changed his mind several times over whether to run next year but has shown increasing signs of wanting to return to the political front line.
He faces deep divisions within the PDL, which is lagging in opinion polls and split between loyalists opposed to Monti and other factions, including many who want to continue backing the government's reform agenda.
Berlusconi's indecision has further undermined the party he founded, whose support is now at less than half the level that won it a landslide election victory in 2008.