Italy coalition faces risk as Senate panel meets on Berlusconi
* Senate committee begins considering Berlusconi expulsion
* Future of government at risk if centre-right leader forced out
* PM Letta warns over "permanent chaos" in Italian politics
By James Mackenzie
ROME, Sept 9 (Reuters) - A special committee of the Italian Senate meets on Monday to consider expelling Silvio Berlusconi following his conviction for tax fraud, a decision that could shatter the fragile ruling coalition and plunge Italy into fresh political crisis.
Senior figures in Berlusconi's centre-right People of Freedom (PDL) party have threatened to pull out of Prime Minister Enrico Letta's government if Berlusconi is stripped of his seat in the Senate.
The process that could lead to at least temporary political exile for the 76-year-old billionaire may take weeks. With tensions high between partners in the governing coalition, open conflict at Monday's meeting could trigger a crisis.
The 23-member panel, with representatives from the main parties, is dominated by Berlusconi adversaries. At least 14 lawmakers are likely to vote in favour of expulsion.
Financial markets have been increasingly on edge as political tensions have escalated ahead of the meeting, driving up government borrowing costs.
With Italy struggling with a 2 trillion euro public debt and mired in its longest recession since World War Two, business leaders warned that political turmoil could snuff out the first glimmers of a turnaround.
"Political stability is a pre-condition for economic recovery, and if there were to be a crisis, the recovery would be at risk", Federico Ghizzoni, chief executive of Unicredit, Italy's largest bank by assets, said at the weekend.
So far, Letta's centre-left Democratic Party (PD) has insisted that Berlusconi cannot remain in parliament after Italy's top court convicted him of being at the centre of a vast tax fraud scheme at his Mediaset television empire.
The PDL says Berlusconi, sentenced to four years in jail, has been targeted unfairly by left-wing magistrates and accuses the PD of using judicial tactics to eliminate a rival it has been unable to defeat politically.
The complicated committee rules may avert an immediate showdown between the centre-left PD and Berlusconi's centre-right PDL, which were forced together in an unwilling coalition after deadlocked elections in February.
The committee is due to meet at 3 p.m. (1300 GMT) with proposals from PDL member Andrea Augello on how to organize the proceedings, which may make clear whether or not there is any margin for a compromise.
Berlusconi's lawyers argue that the "Severino law", under which convicted politicians are ineligible for parliament, cannot apply in Berlusconi's case because it was passed last year.
Berlusconi's lawyers have appealed to the European Court of Human Rights. They want the Senate committee to postpone proceedings until the European Court decides or Italy's constitutional court rules on whether the law is valid.
That possibility has been rejected by the PD, which accuses the PDL of trying to waste time with groundless appeals.
As the manoeuvres continue, President Giorgio Napolitano, who has played a decisive behind-the-scenes role in Italian politics since the Berlusconi crisis erupted, may play a significant part again.
He has made it clear that he would be unwilling to call new elections and may seek to shepherd in a new coalition government if the centre-right withdraws support for Letta.
Whatever the outcome of the committee meeting, Berlusconi faces months in the political wilderness, which could prevent him from standing in any election if the government falls.
His four-year jail term, commuted to one year because of his age, would also prevent his participation in national politics if elections are called this year.
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