UPDATE 2-Italy's Letta meets centre right, fails to resolve problems
* Partners in coalition remain "distant" after tense talks
* Stand-off threatens future of fragile government
* Some progress made on property tax reform
ROME, Aug 21 (Reuters) - Italian Prime Minister Enrico Letta met with Silvio Berlusconi's centre-right party on Wednesday to seek a solution to a stand-off that threatens his fragile coalition, but positions remained "distant", a government source said.
Berlusconi's conviction for tax fraud has shaken the stability of the left-right coalition, with the former prime minister's People of Freedom (PDL) party demanding guarantees for his political future.
Letta and PDL Secretary Angelino Alfano held tense talks for almost three hours on Wednesday evening, but failed to reach any agreement on how to proceed regarding Berlusconi.
"In terms of the Berlusconi question, the meeting did not go well. Positions remain distant," the government source said, adding that some progress was made towards a deal on property tax reform.
PDL leaders have presented a list of demands to Letta as the price for their continued support of an awkward coalition of traditional rivals, forced to rule together to end months of post-election stalemate in April.
In autumn, Berlusconi, a four-time prime minister, faces a vote in the Senate on whether to remove him from parliament and prevent him from standing for election.
The 76-year-old billionaire recently relaunched Forza Italia, the party that first swept him to victory in 1994. His allies are lobbying hard to guarantee his freedom to campaign, desperate to protect a charismatic leader who has dominated Italian politics for almost two decades.
The PDL wants Letta's centre-left party to give an earlier signal of how it plans to proceed in the vote, and Alfano warned Letta on Wednesday that the PDL would not be able to stay in a coalition with a party that votes to eject its leader from parliament, PDL sources said.
Letta believes the matter is now firmly up to parliament and not something his Cabinet can get mixed up in, the government source said.
While tension remained high at the meeting, some progress was made on plans to reform an unpopular property tax, another issue that has strained the coalition.
The government source said there was now hope an agreement on the IMU levy on primary residences, which Berlusconi's party wants abolished, will be found at a Cabinet meeting next week.
Earlier on Wednesday, Letta said Italy needed political stability so that the economy could recover after its longest postwar recession, adding he was confident the government's problems could be resolved.
"I am sure that everyone will do their part to get out of this difficulty, which I think can be overcome," he said during a visit to Austria.
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