Italian government's fate hangs on Berlusconi court ruling
* Court to rule on prison sentence and ban from office
* Berlusconi's final appeal over tax fraud case
* Fate of Letta's 3-month-old coalition in the balance
By Barry Moody
ROME, July 29 (Reuters) - The fate of Italy's fragile government hangs on a ruling by the supreme court, which meets on Tuesday to decide whether to uphold a tax fraud conviction against former Prime Minister Silvio Berlusconi.
Italy's Cassation Court will rule on the media magnate's final appeal against a jail sentence and 5-year ban from public office handed down by lower courts for the fraudulent purchase of broadcasting rights by his television network Mediaset .
While the political fallout is as uncertain as the decision itself, there is a strong possibility that a guilty verdict would endanger the government of Enrico Letta, an uneasy coalition of his centre-left Democratic Party (PD) and Berlusconi's centre-right People of Freedom (PDL).
The political uncertainty in the euro zone's third largest economy could cause new jitters throughout the bloc as southern European countries struggle to emerge from grinding recession and debt crises.
The decision by five judges could come on Tuesday or slip into Wednesday or even Thursday, court sources said. The hearing was unexpectedly accelerated to avoid part of the sentence being cancelled by the statute of limitations.
PDL hawks have called for everything from a mass resignation from the government to blocking Italy's motorways if the court rules against the four-times premier, with one of his most devoted supporters, Daniela Santanche, saying it would be "an assault on democracy."
Berlusconi and his supporters accuse leftist magistrates of persecuting him for 20 years to try to keep him out of power.
But a greater risk to the government could come from Letta's faction-ridden PD, many of whose members are already deeply unhappy with being in a coalition with their old enemy and may refuse to continue if he is found guilty.
However, both President Giorgio Napolitano, who dragged the parties into a coalition in April after a two-month crisis that followed inconclusive elections, and Letta himself are adamant that Italy cannot afford more instability as it struggles to climb out of its worst postwar recession.
"I am not scared. Italy is more stable than people expect," Letta said during a visit to Greece on Monday.
Both of the major parties may also be reluctant to precipitate an election whose result could be even more chaotic and unpredictable than the February vote and boost support for the populist 5-Star Movement of comedian Beppe Grillo.
BERLUSCONI COUNSELS MODERATION
Berlusconi has for months kept a lid on his hawks, counselling moderation and projecting an image of statesmanship, saying he would not pull the plug on the government with Italy suffering an economic emergency.
However, political sources say this stance was dictated by Berlusconi's lawyers, who wanted to avoid upsetting the supreme court judges. The mercurial magnate's reaction if he is found guilty is uncertain, however.
On Sunday, Berlusconi, 76, broke silence, saying he would insist on going to jail rather than face house arrest or community service for the jail sentence, which has been reduced from four years to one under a 2006 amnesty.
He also told a friendly newspaper, Libero, that while he would not bring down the government, he thought Letta's party would not want to rule with him if he was convicted of a serious crime and banned from public office.
Berlusconi's office later issued a statement that sought to tone down those comments.
His lawyers argue that Berlusconi was not the company official responsible for the tax fraud under which the price paid for television rights was inflated and the money skimmed off into illegal slush funds.
They have filed 50 objections. The Supreme Court rules only on legal procedure and whether the previous appeal court properly justified its sentence.
The court has three choices: convict Berlusconi definitively, acquit him or send the case back to the appeal court because of legal mistakes. It could also postpone a decision, probably until September - a move advocated by moderate politicians who want to avoid a summer crisis.
Even if Berlusconi is found guilty, his ban from public office depends on a vote by his peers in the Senate which could take weeks or months.