Italy's Letta calls coalition meeting to smooth tensions
* Prime minister calls fractious parties together
* Monti threatened to withdraw support over pace of reforms
* Internal rifts, Berlusconi trials, threaten stability
ROME, July 4 (Reuters) - Italian Prime Minister Enrico Letta meets members of his uneasy left-right coalition on Thursday, aiming to ease tensions that have slowed reforms and hampered efforts to keep public finances under control.
Letta called the meeting after former prime minister Mario Monti, whose centrist Civic Choice movement supports the government, threatened this week to withdraw his backing unless the pace of reform was stepped up.
The coalition of traditional rivals has been under strain almost from the moment of its inception in April, two months after deadlocked elections which left no party with a viable majority in parliament.
Relations between Letta's centre-left Democratic Party (PD) and the centre-right People of Freedom (PDL) party of former prime minister Silvio Berlusconi have been particularly frosty, with an almost constant exchange of barbs from each side.
At the same time, all the parties have also been battling to contain serious internal divisions and leadership struggles which have exacerbated the tension and made it impossible to rally consensus for potentially unpopular reforms.
For the moment, there is little expectation of a return to elections, not least because the result would almost certainly be another deadlocked parliament.
But with Italy, the euro zone's third largest economy, in its longest recession since World War Two and borrowing costs creeping higher on increasingly nervous financial markets, Letta can ill afford major splits.
He has pledged to ease the severe austerity policies pursued by Monti's government and cut a youth unemployment rate of around 40 percent but at the same time respect the tight spending limits imposed by European Union budget rules.
Economy Minister Fabrizio Saccomanni has announced plans for a review of public spending but admitted on Wednesday that major cuts would require tough political decisions and, in the short term, the room for manoeuvre was limited.
The climate of suspicion between the PD and PDL in particular has held up any more ambitious efforts to tackle the structural problems that have made Italy one of the world's most sluggish economies for more than a decade.
The two sides have differences on tax and economic policy, exemplified by an unresolved dispute over PDL demands to scrap an unpopular housing tax which would leave an annual funding gap of 4 billion euros in an already badly strained budget.
A bruising series of legal verdicts against Berlusconi, who is now fighting two prison sentences as well as a ban on public office and expulsion from parliament for tax fraud and sex offences, has added to the uncertainty.
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