* Berlusconi's party up in arms over supreme court decision
* Court could ban Berlusconi from public office
* Some Berlusconi lieutenants want October election
By Barry Moody
ROME, July 10 (Reuters) - Silvio Berlusconi's party boycotted a summit of Italy's fragile coalition government and blocked parliamentary activity on Wednesday in protest against a supreme court decision to fast track a ruling that could ban him from public office.
Almost all activity in both chambers of parliament was suspended for a day because of the protest by Berlusconi's People of Freedom (PDL) party, one of the two main partners in Enrico Letta's left-right coalition government.
The court decision has aggravated tension in the squabbling coalition which was already under fire for the slow pace of reforms desperately needed to boost recovery from the worst recession since World War Two.
The supreme court was forced on Wednesday to issue an unusual statement defending its decision to hear Berlusconi's final appeal on July 30 against a tax fraud conviction. The 76-year-old media magnate's lawyers had not expected a ruling until late in the year.
The court will rule on whether to uphold a four-year jail term and five-year ban on holding public office for complicity in tax fraud at Berlusconi's Mediaset television empire.
Although Berlusconi will probably escape jail because of his age if the sentence is confirmed, he could be thrown out of parliament in what would be a major shock to Letta's fragile government.
Letta said on Tuesday night the government would survive whatever happened but some hawks in Berlusconi's party are thought to want to force an election as early as October if he is condemned.
In an attempt to ensure PDL loyalty, Letta again promised in a television interview that he would abolish a hated housing tax which is the PDL's central demand, despite the difficulty of doing this while remaining within European Union budget constraints.
The supreme court said it had been forced to call a special summer holiday sitting on July 30 because otherwise part of the case against Berlusconi would have expired under the statute of limitations on Aug. 1.
Berlusconi's legal team say the expiration would not occur until late September.
Berlusconi and his aides believe the court decision, in sharp contrast to the usual snail's pace of Italy's legal system, is another example of what he calls sustained and undemocratic persecution by leftist magistrates.
The former premier said the decision was inspired by his enemies in the Milan prosecutor's office who have brought many cases against him, including his recent conviction for paying for sex with a Moroccan-born underage nightclub dancer nicknamed "Ruby the Heartstealer" and abusing his office to try to cover it up.
He was sentenced to seven years jail in the "bunga bunga" case last month but that sentence will not become definitive until two appeals are exhausted.
Berlusconi has played a key role since Letta's government was formed in April in keeping his hawkish lieutenants on a tight leash, but the supreme court decision has caused anger and resentment in his party with demands for street protests and blocking of all parliamentary activity.
A substantial faction of Letta's own centre-left Democratic Party also opposes the government alliance with Berlusconi but President Giorgio Napolitano, the effective godfather of the coalition, is adamantly opposed to early elections in the midst of Italy's worst postwar recession.
Ratings agency Standard & Poor's cut Italy's sovereign credit rating on Tuesday to just two notches above junk because of concerns about the economy, third largest in the euro zone, which has been dogged by extremely sluggish growth for more than a decade.
Napolitano, 88, who has greatly increased his loosely defined powers since last year, stepped in to bang heads together and force the formation of a coalition government following a long hiatus after inconclusive elections in February.
Analysts say there are several factors that may force Berlusconi to resist the temptation to bring down the government even if the supreme court rules against him.
One is that the duelling coalition partners have still not reformed a dysfunctional electoral law which could produce another impasse if an election is held in the autumn.
The second is that if the PDL walks out of the government, Letta's Democratic Party could form an anti-Berlusconi alliance with the populist 5-Star Movement of former comic Beppe Grillo, which would aggravate the billionaire businesman's problems.