UPDATE 3-Italy PM Renzi faces parliament promising tax cuts, reform
* New government faces first confidence vote in parliament
* Renzi promises quick action, cuts to tax on labour
* Says will pay off arrears owed by public administration
* Euro zone's third largest economy in urgent need of change
ROME, Feb 24 (Reuters) - Prime Minister Matteo Renzi, approaching a confidence vote in his new government on Monday, pledged to cut labour taxes, free up funds for investment in schools and pass wide institutional reforms to tackle Italy's economic malaise.
Facing parliament for the first time, the 39-year-old Renzi - Italy's youngest premier - sketched out an ambitious programme of change in an hour-long speech delivered in his trademark quickfire style interspersed with occasional jeers from the opposition benches.
"If we lose this challenge, the fault will be mine alone," he told the Senate. The euro zone's third-largest economy is in urgent need of potentially painful reforms and is weighed down by a 2-trillion-euro public debt.
Backed by his own centre-left Democratic Party (PD), the small centre-right NCD party, centrists and other miscellaneous groups, Renzi should win the vote in the 320-seat upper house, due some time around 2100 GMT.
But there will be close attention paid to the size of his majority following signs of dissent in his own party.
The outgoing mayor of Florence, who won the leadership of the PD in December, forced his party rival Letta to resign as prime minister earlier this month after repeatedly criticising his government's record.
Renzi promised sound public finances, which he said was a duty Italy owed to its own children rather than to its European Union partners, but offered little detail and did not say whether his government would seek any easing in tight EU budget limits as he has suggested in the past.
He promised to make it cheaper for companies to take on staff by reducing payroll taxes with a double-digit cut in the so-called tax wedge - the difference between what it costs a company to employ a worker and the worker's take-home pay - in the first half of the year.
He said the measure would be financed by spending cuts and other measures and said the government would evaluate increasing tax on financial income to pay for a wider labour shake-up.
On Sunday, his chief of staff Graziano Delrio caused a stir by suggesting the government was considering raising taxes on government bonds, which are popular with Italian savers.
Renzi took office on Saturday promising a radical increase in tempo, with an overhaul of the electoral and constitutional system to ensure more stable governments in future, tax and labour reforms and a shake-up of the bloated public administration, all within his first 100 days.
The tone of his speech was direct and colloquial, in contrast to the sober style of his two predecessors, Letta and Mario Monti. Noting that, at 39, he was not even old enough to hold a seat in the Senate, where the minimum age is 40, he said that politics had lost touch with citizens.
"If we'd paid the same attention to what people say in their local markets that we often paid to the financial markets, we would have noticed that the first thing people want is simplicity," he said.
He said the government's priority had to be to help small businesses and people who had lost their jobs and he promised to strengthen welfare protection for the unemployed.
The public administration would completely pay off its arrears of unpaid bills, completing a campaign to free up billions of euros owed to private sector suppliers begun by his predecessor Letta.
He gave little detail about how he intended to fill the funding gap left by paying off the arrears but said it could involve the state-owned investment holding Cassa dei Depositi e Prestiti (CDP).
A comprehensive package of reforms to the notoriously sluggish justice system would be completed by June and long-promised electoral and constitutional reforms would be in place and ready to go before parliament by the end of March.
Monday's Senate vote will be followed by a separate vote on Tuesday in the lower house, where the PD has a strong majority, and that will wrap up the parliamentary process required by every new government.