* Court upholds tax fraud conviction against Silvio Berlusconi
* Decision seen dealing a heavy blow to his political influence
* Business interests already under pressure in recession
* Berlusconi's children at helm of business empire
* Mediaset shares down 2.5 percent (Adds source comments, background, shares)
By Stephen Jewkes and Jennifer Clark
MILAN, Aug 2 The upholding of a tax fraud conviction against former Italian premier Silvio Berlusconi compounds the problems facing his $6.6 billion business empire, already struggling in a deep recession, and gives new impetus to questions about its future leadership.
The conviction raises the prospect that the 76-year-old's twenty-year dominance of Italy's political scene could fade, and with it any influence he could wield on behalf of business interests ranging from broadcaster Mediaset and publishing house Mondadori to soccer club AC Milan.
"The truth is this signals another step towards the end of Berlusconi's political life," said Bernstein analyst Claudio Aspesi.
"It will be increasingly difficult for him to govern and this in turn basically means the political protection he has been able to give Mediaset in recent years is destined to wane."
Berlusconi, a four-time prime minister whose family controls Mediaset and Mondadori through its unlisted Fininvest holding company, has long rejected claims that he used his political influence to further his business interests.
People close to the matter say he is not as involved in Fininvest as he once was, and that his business fortunes are less linked to politics now than they were back in the 1980s, when his expansion from construction into television would not have been possible without the blessing of government.
"Berlusconi keeps his distance from the company. He of course makes decisions as a shareholder," one source close to the situation said on Friday.
However, even if Berlusconi's media assets have of late helped his political career more than the other way around, the signs are that investors view his companies more favourably when he is at the heart of government.
Mediaset, which captures more than 60 percent of television advertising spend in Italy, outperformed its market in the years of Berlusconi's dominance, and the stock surged 130 percent last year, helped in part by his return to power as the party he leads joined a left-right coalition government.
At 1405 GMT, Mediaset shares were down 2.5 percent at 3.286 euros. That was despite the firm saying on Thursday that advertising sales in July rose 4 percent, the first increase in almost two years.
SLIM CHANCE OF A SALE
With Italy gripped in a two-year recession, Berlusconi's business interests, which also include Spanish broadcaster Mediaset Espana and a stake in asset manager Mediolanum , need all the help they can get.
Fininvest, which posted revenues of 5.1 billion euros in 2012, has historically paid dividends of some 150-200 million euros which fund Berlusconi's five children's' lavish lifestyles - often chronicled in Mondadori's own glossy magazines.
But now both Mondadori and Mediaset - managed by the two eldest offspring Marina and Pier Silvio respectively - are struggling to keep on top of the technological changes ripping through the media industry, compounding the damage wrought by a weak advertising market in Italy's recession.
Mediaset has been forced into a cost-cutting drive after reporting its first ever annual net loss for 2012, and Mondadori embarked on a surprise management shakeup in February as it seeks to return to profit.
By all accounts, Berlusconi is not involved in day to day decisions at Fininvest, although he is reported to meet Marina, Pier Silvio and other managers of his business empire on Mondays at his 145-room villa at Arcore outside Milan.
But the media glare and political turmoil swirling around the family from Berlusconi's legal troubles has been a painful distraction for his heirs as they run Mediaset and Mondadori day to day, the source close to the situation said.
There has also been speculation that Fininvest Chairwoman Marina Berlusconi might step into her father's political shoes, potentially drawing her away from the business world, although she has denied this.
As Berlusconi's legal woes mounted, speculation grew he could be tempted to sell Mediaset or seek allies to address the conflict of interest questions that have dogged his career.
Fininvest faces another test later this month, when Italy's supreme court is expected to rule on a case that could force it to pay more than 500 million euros in damages stemming from the acquisition of Mondadori from CIR twenty years ago.
A defeat for Fininvest would be a particularly bitter pill, since it would mean a victory for historic business rival Carlo De Benedetti, who owns CIR.
"If the price is right he could sell, but I find it hard to believe he would sell his own creation. I give it a 25-30 percent chance," Ifigest fund manager Roberto Lottici said. (Additional reporting by Danilo Masoni Editing by Jane Merriman and Mark Potter)