* Cabinet fails to agree new budget measures
* Economy Minister Saccomanni furious
* Coalition close to breakdown over Berlusconi legal woes
* Borrowing costs rise at bond auction
By Francesca Piscioneri and Giuseppe Fonte
ROME, Sept 27 Italian Prime Minister Enrico
Letta failed to secure backing for a vital package of fiscal
measures on Friday as divisions with centre-right partners in
his fragile coalition took the government to the brink of
Letta flew back from a visit to New York with coalition
unity already in tatters after a threat by centre-right
lawmakers to walk out over Silvio Berlusconi's battle against a
conviction for tax fraud.
After two days of mounting tension and with financial
markets on edge, he met ministers late on Friday in a last-ditch
bid to avert a rise in sales tax and secure approval for
additional budget measures needed to bring Italy's deficit
within European Union limits.
However, with the meeting still in progress, officials made
clear that no deal could be reached.
"The conditions aren't in place at the moment," said one
official, who spoke on condition of anonymity.
Letta is now expected to go before parliament next week to
seek support to continue in office.
Failure to agree on some 3 billion euros of budget measures,
demanded by both Letta's centre-left Democratic Party (PD) and
Berlusconi's People of Freedom (PDL), underlined the breakdown
between the two traditional rivals which were forced together by
last February's deadlocked election.
Economy Minister Fabrizio Saccomanni, who has staked his
credibility on meeting the EU budget limits and faced constant
sniping from the PDL over recent months, was furious at the
breakdown, officials said.
PDL lawmakers said proposals to avert the one percentage
point rise in sales tax, scheduled to take effect in October,
would have been funded by an increase in fuel taxes which would
have punished consumers.
With the sales tax hike, passed by the previous government
led by Mario Monti, due to kick in on Tuesday, prospects for a
deal appear remote.
"We can't accept the blame for this," PDL secretary Angelino
Alfano, who is also deputy prime minister, told the cabinet,
according to one official. "We can't stay in the government if
taxes are going up and there are no cuts to spending," he said.
MEETING WITH PRESIDENT
Letta's left-right coalition has flirted with collapse ever
since Italy's top court convicted former premier Berlusconi of
tax fraud last month and sentenced him to four years in prison,
commuted to a year of house arrest or community service.
On Wednesday, PDL lawmakers said they would resign en masse
if a Senate committee meeting on Oct. 4 votes to begin
proceedings to expel their leader from parliament.
On returning to Italy on Friday after courting foreign
investors in New York, Letta met President Giorgio Napolitano
who, if the government fell, would have to either call new
elections or try to oversee the creation of a new coalition.
A spokesman for the president's office said the head of
state, who has repeatedly said he does not want a return to the
polls, had given Letta his full support to seek the backing of
cabinet and parliament.
If Letta, who has a commanding majority in the lower house,
can secure the backing of a few dozen Senators among PDL rebels
or opposition parties including the anti-establishment 5-Star
Movement, he could form a new coalition.
The political convulsions in the eurozone's third largest
economy have increasingly worried investors, although with the
European Central Bank guaranteeing stability in the markets,
there has been none of the panic seen during previous crises.
At an auction of 10-year bonds on Friday, Italy's borrowing
costs rose to their highest level in three months, while the
premium investors demand to hold Italian debt rather than
AAA-rated German paper widened to 267 basis points from under
250 at the start of the week.