UPDATE 1-Small parties threaten Italy government on electoral reform
* Electoral reform is key issue on Letta coalition's agenda
* Italy long plagued by political instability
ROME Jan 17 (Reuters) - The three small parties backing Italian Prime Minister Enrico Letta's coalition government threatened on Friday to bring down his administration unless they are part of an agreement on electoral reform.
Italy's politicians are making a fresh attempt to reform the electoral system in the hope of providing steadier and more durable government in a country long plagued by instability.
In last year's election, no party gained enough votes to govern alone, plunging Italy into political stalemate before the creation of a broad-based coalition government which has constantly bickered and struggled to produce reforms.
Matteo Renzi, the new leader of the centre-left Democratic Party (PD) - the largest in the government to which Letta also belongs - has put electoral reform at the top of his agenda.
But the three small parties fear Renzi is trying to cut a deal on reform with the main opposition centre-right movement of former prime minister Silvio Berlusconi that would be more beneficial to the two larger parties.
The New Centre Right (NCD) of Deputy Prime Minister Angelino Alfano, the Civic Choice party of former premier Mario Monti and a new centrist formation demanded a meeting of coalition partners to discuss how to change the electoral system.
"With regards to the PD leader's consultations on electoral reform... in particular his talks with the opposition, we urgently call for a meeting of the majority lest the fragile equilibrium on which the government rests falls apart, leading to a government crisis," the three parties said in a statement.
SMALL PARTY FEARS
The NCD, which broke away from Berlusconi's centre-right last year, and the other two parties want a system that would allow them to win seats in parliament despite their small size.
Renzi and Berlusconi favour a system based on proportional representation with a large number of small constituencies each electing four or five representatives and a winner's bonus of 15 percent of seats.
Alfano, whose NCD is a key part of Letta's governing coalition, fears such a system would reward the larger parties and prefers a French-style two-round system, which obliges the large parties to strike pre-election deals with smaller ones.
Despite the recent frenzied talks about electoral reform, an agreement may not lead to a new law quickly.
Both Letta and Renzi have said that the introduction of a new electoral law needs to go hand in hand with a reform of Italy's upper house, the Senate.
Such a major overhaul of Italy's institutional structure would have to go through lengthy constitutional amendments.