* PM Letta ends logjam on party financing bill
* Response to public anger over political costs
* Cabinet also passes package to try to help economy
ROME, Dec 13 (Reuters) - Italy's cabinet passed an emergency decree on Friday to phase out state financing of political parties in response to public anger over the cost of the country's electoral apparatus.
Legislation to abolish state funding was presented by Prime Minister Enrico Letta's government in May, but the bill got bogged down in parliamentary bickering, fuelling the perception that the parties really wanted to preserve the status quo.
The decree, which must be approved by parliament within 60 days or it will expire, reiterates the original proposal to gradually replace the current system with financing by private citizens by 2017.
The popularity of Italy's political parties has been eroded by decades of wasteful spending and corruption. The plan to stop funding them with taxpayers' money has wide support.
The decision to give the plan another push is likely tied to this week's election of Florence's mayor Matteo Renzi as the new leader of Letta's Democratic Party (PD) in a primary vote.
Renzi's rise in popularity over the past two years has been linked to his stinging criticism of the old PD leadership and its dependence on public funding, which he has repeatedly said should be abolished.
A referendum to scrap party financing was overwhelmingly passed in 1993 but its outcome was substantially ignored. The previous form of direct financing was replaced with generous reimbursements of money parties spent in election campaigns.
The planned abolition will reduce current public financing by 40 percent in the first year after the law is passed, 50 percent in the second year and 60 percent in the third. State financing would be fully phased out in the fourth year.
Under the new system, citizens who choose to give money to political parties would be able to deduct the payments from their taxes.
Cutting state funding was a signature policy proposal of the anti-establishment 5-Star Movement, which won a quarter of the votes at February's national election and accepts no such contributions.
Letta said the government's decree showed he was keeping his promise, but 5-Star Movement leader and former comic Beppe Grillo, dismissed it as "yet another joke".
He said if the traditional parties really wanted to renounce public funding they simply needed to follow 5-Star's example by not taking it.
The cabinet on Friday also approved a series of measures aimed at helping the economy, which has been shrinking for the last two years.
These included fiscal incentives for companies to invest in research and innovation and steps to help companies raise funds through corporate bonds as an alternative to scarce bank credit.
The package also aims to reduce energy costs for companies by revising the current billing system, and to cut car insurance costs and fraud by revising the system of claims and premiums. (Reporting by Giuseppe Fonte, writing by Gavin Jones)