Italian business lobby attacks Letta's inaction on economy
* Confindustria chief says government not helping recovery
* Threatens to appeal to president Napolitano
* PM Letta looks isolated in face of attacks from all sides
* Accuses Confindustria's Squinzi of being a "doom-monger"
ROME, Feb 6 (Reuters) - The head of Italy's main business lobby on Thursday accused Enrico Letta's government of failing to help the economy and threatened to appeal directly to the head of state unless Letta sets out specific reforms this month.
The economy, the euro zone's third largest, is struggling to emerge from its longest post-war recession. Confindustria has called, largely in vain, for Letta's fragile left-right coalition to cut public spending and ease taxation and labour rules.
Relations have soured steadily since the 2014 budget presented last autumn fell far short of Confindustria's requests for a decisive cut in labour taxes.
This week Letta accused Confindustria president Giorgio Squinzi of being a "doom-monger" after Confindustria said the government was too upbeat in its forecasts for a firm and sustained economic recovery this year.
"Rather than being a doom-monger, I would say I am a realist," Squinzi said in a radio interview on Thursday with state broadcaster RAI.
The government forecasts economic growth of 1.1 percent this year, while Confindustria expects just 0.6-0.7 percent, much closer to the projections of virtually all independent economists.
Squinzi, who met Letta on Wednesday to try to ease tensions, said he had set out the employers' priorities, requiring "very rapid action", and he hoped Letta would meet them when he attends a Confindustria assembly on Feb. 19.
If he failed to do so, "we will have no option but to appeal to (President Giorgio) Napolitano", said Squinzi.
He did not spell out what he would ask Napolitano to do, but the president is the only figure who could dissolve parliament and call fresh elections.
Squinzi said Letta's "inertia" was not entirely his own fault, but "is also the product of a very confused political and institutional situation".
With parliament preparing to debate proposals to change electoral rules blamed for chronic political instability, furious rows between the parties, sometimes bordering on physical fights, have poisoned the political atmosphere.
Letta has appeared isolated in the face of criticism from Confindustria, from the centre-right opposition and also from Matteo Renzi, the leader of Letta's own Democratic Party, which is the mainstay of the ruling coalition.
An editorial on Wednesday in the Confindustria-owned business daily Il Sole 24 Ore attacked the government for doing virtually nothing to revive domestic demand, create jobs or encourage stagnant investments.
The government has accused Confindustria of ingratitude for its efforts to pay off some 40 billion euros ($54 billion) of arrears in bills owed by the public sector to businesses, but the European Union this week said Italy was still failing to pay new bills in an acceptable time frame of 30 to 60 days .
Italian media have run unsourced reports that Letta is considering resigning and seeking a fresh mandate from Napolitano at the head of a re-shuffled cabinet team.
Some reports have speculated early elections could be held in May or that Letta could even be replaced by Renzi as prime minister in a coalition deal without returning to the polls. ($1 = 0.7390 euros) (Writing by Gavin Jones; Editing by Ruth Pitchford)
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