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ROME (Reuters) - Former premier Silvio Berlusconi's threat to bring down Italy's government underscores deep divisions in his center-right party ahead of next year's elections and risks rattling markets which see Prime Minister Monti as Italy's saviour.
Berlusconi made the unexpected threat on Saturday, still fuming from his conviction 24 hours earlier on charges of tax fraud and a jail sentence of four years which he will not have to serve until all appeals are exhausted.
In a hastily called news conference he attacked the magistrates who convicted him as part of a caste of leftist "dictators" a vitriolic charge he has leveled many times before.
But then he trained his sights on Prime Minister Mario Monti's economic policies.
"We have to recognize the fact that the initiative of this government is a continuation of a spiral of recession for our economy. Together with my collaborators we will decide in the next few days whether it is better to immediately withdraw our confidence in this government or keep it, given the elections that are scheduled," he said.
Only three days earlier, when he announced he would not be a candidate for prime minister in next April's elections, Berlusconi said the Monti government had "done much" and was going "generally" in the right direction.
The Monti government of non-elected technocrats is supported by the center-left, the center-right and the center. It would lose its majority and have to resign if most of Berlusconi's PDL party withdrew support.
The possibility of a government collapse before elections scheduled for next April spooked financial and political commentators, who worried about market reaction.
"The damage would be enormous," Stefano Folli, editor of Italy's leading financial daily, Il Sole 24 Ore. "Damage in terms of political neurosis, international anxiety, threats to the stability law (the annual budget), and a general discrediting."
Monti has pushed through painful tax hikes, spending cuts and a pension overhaul to cut public debt which is running at 126 percent of gross domestic product, according to the International Monetary Fund.
Unemployment in Italy has risen to 10.7 percent, its highest level since monthly records began in 2004, and unions are locked in disputes with companies over plant closures and layoffs
Fabrizio Cicchitto, leader of Berlusconi's PDL party in the lower house of parliament, was cool to the idea of a government crisis, saying instead that the country had to avoid "an explosion" of the spread between German and Italian bonds.
On Friday, Italy's 10-year bonds were yielding 336 basis points more than debt of similar maturity issued by Germany, widely seen as Europe's safest. When Monti took over from Berlusconi in November, the spread was about 550, sending borrowing costs soaring to 7.6 percent.
"Italian political risk is rearing its ugly head again," said Nicholas Spiro, head of Spiro Sovereign Strategy in London.
"Berlusconi knows he can't return to frontline politics. So instead, he is opportunistically exploiting the chronic political instability in Italy and, more worryingly, the German-led crisis management policies in the eurozone in a bid to shore up the flagging support for his center-right party," he said.
In his long, rambling news conference on Saturday, Berlusconi, 76, attacked Monti for bowing to what he called Germany "hegemony" in European economic matters.
"These are critical weeks for the eurozone and Italy can ill afford further political uncertainty at a time when it's seeking to differentiate itself favourably from the troubles in Spain," Spiro said.
The fact that Cicchitto and other PDL leaders did not rush to second Berlusconi's suggestion of a government collapse spoke volumes about the rifts within the party, divided between hard-core Berlusconi supporters and moderates such as party secretary Angelino Alfano.
The divisions meant the PDL would likely not vote as a united bloc in a no-confidence vote.
"I don't think Berlusconi has the numbers to topple the Monti government but he does have the numbers to make life very difficult for the government," said Rosy Bindi, president of the center-left Democratic Party (PD).
Some commentators said that if the Monti government did collapse, elections might be held in February instead of April. Monti has not commented on Berlusconi's threat.
Berlusconi, whose "bunga bunga" parties with aspiring starlets won worldwide notoriety, has taken a largely backseat role in politics since he was forced to step down, but he remains the dominant figure within the PDL, of which he is president.
Some political commentators said that by threatening Monti, Berlusconi may be trying to patch up relations between the right wing of his party and the Northern League. The League, a former Berlusconi ally, does not support the Monti government.
An important indication of the strength of Italian parties will emerge on Monday, when counting begins on Sunday's vote in Sicily to elected a new regional government.
Reporting By Philip Pullella; Editing by Giles Elgood