UPDATE 1-In a boost for PM Renzi, Italy approves new electoral law
* Approval seen as test case of Renzi reform credentials
* Prime minister set to unveil cuts to income tax, job measures
* New voting system faces criticism
ROME, March 12 (Reuters) - Italy's lower house of parliament approved a new electoral law aimed at ensuring more stable governments on Wednesday, giving a boost to Prime Minister Matteo Renzi as he prepares to unveil a fresh package of tax cuts and economic reforms.
The reform, aimed at preventing a repeat of last year's deadlocked election by favouring bigger parties and stronger coalitions, must now go to the Senate where it is likely to face additional amendments from Renzi's own centre-left Democratic Party (PD).
Replacing the widely criticised electoral system, parts of which have been ruled unconstitutional by Italy's highest court, has been seen as a test of 39-year-old Renzi's ability to pass wider reforms to help pull Italy out of its worst economic slump since World War Two.
Renzi, who reached an accord with centre-right leader Silvio Berlusconi before the package came to parliament, pressed hard for the bill to be approved before he presents his first concrete tax cuts since taking office.
Economic reforms, expected to include 10 billion euros ($13.87 billion) in income tax cuts for low earners and more flexible employment rules to boost job creation, are intended to give a lift to a national mood darkened by two years of recession and record unemployment.
"On April 27, there will be another 100 euros in pay packets," Renzi was quoted as saying by the La Repubblica daily. He is due to unveil the measures at a news conference at 5 p.m. (1600 GMT).
The electoral reform is not directly connected with the economic measures. But Renzi, who took office last month after ousting his party colleague Enrico Letta, has promised an ambitious timetable of reforms and he could ill afford any significant delay on a measure he has promised for months.
"Thanks to the deputies. They've shown we can really change Italy. Politics 1-Defeatism 0," he tweeted after the vote.
The bill approved in parliament has faced opposition from smaller parties and increasing criticism from within the PD, where party critics say the prime minister made too many concessions to Berlusconi.
The electoral law sets higher minimum thresholds for entry to parliament, which will reduce the number of smaller parties, and provides for a run-off round to decide the winner if no coalition or party reaches a minimum of 37 percent of the vote.
Whichever side wins will benefit from a so-called "winner's premium", guaranteeing a clear majority.
However it maintains aspects of the old law that were widely criticised, including the system of so-called "blocked lists" chosen by the parties which does not allow voters to vote directly for individual candidates.
Most critically, it does not apply to the Senate, which has equal powers with the lower house but which Renzi wants to reduce to the status of a powerless regional chamber in order to make a stable parliamentary majority easier to achieve.
That change will require a constitutional amendment which could require a year or more to pass. Until it is, any new election would have to be conducted with two separate voting systems for the two chambers.