FACTBOX: Early challenges facing Italy's Berlusconi

ROME (Reuters) - Conservative leader Silvio Berlusconi won a resounding victory in this week's parliamentary election and is now working on forming a new government, which is expected to be sworn in around mid-May.

Here are some of the main challenges he faces over the next few months:

ECONOMY

The euro zone's third largest economy has underperformed its European peers for at least a decade. Struggling in the face of a strong euro and record high oil prices, it is now close to recession.

The outgoing centre-left government last month cut its growth forecast for this year to 0.6 percent and the International Monetary Fund sees growth at just half that rate -- the lowest in the G8 group of rich nations. Italy also has the world's third largest public debt.

Most analysts say Italy needs deep and partly unpopular reforms to raise productivity, cut public spending and liberalize a highly regulated economy.

Berlusconi has little track record in pushing through market-friendly reforms and his main allies, the post-fascist National Alliance and the populist Northern League, have protectionist roots.

ALITALIA

The outgoing centre-left government has been trying to sell its majority stake in the loss-making national airline for more than a year and eventually agreed to a takeover by Air France-KLM. But the deal fell apart over union opposition, though the caretaker government hopes to revive it.

Berlusconi had criticized the deal as unacceptable, but has softened his opposition to it after winning the election.

The media tycoon has promised a rival bid by Italian businessmen but this has yet to materialize. He has also raised the prospect of talks with Russian airline Aeroflot, which briefly expressed interest in buying it last year.

Any alternative to Air France-KLM would have to emerge quickly to avert bankruptcy for Alitalia. The airline has said it only has cash to keep flying until mid-year and the European Union has barred Rome from pumping any more state money into it.

GARBAGE CRISIS

Thousands of metric tons of rotting garbage piled up in the streets of Naples over Christmas and earlier this year after all landfills in the area were declared full.

Streets were cleared before the election, but only by sending the waste abroad. No long-term solution has been found.

The crisis cost the centre-left its 10-year hold on power in Naples and the surrounding Campania region, and Berlusconi has promised to hold his first cabinet meeting there.