* Letta says rivals must challenge him openly
* Pressure grows for new government led by Renzi
* Meeting of centre-left party leadership on Thursday
By James Mackenzie
ROME, Feb 12 (Reuters) - Italian Prime Minister Enrico Letta defied pressure to resign on Wednesday to let centre-left leader Matteo Renzi form a government, saying anyone who wanted him out must say so openly and outline what they would do in his place.
Letta’s comments came at the end of a day of mounting tensions in Rome where the two men met for what the prime minister described as a “frank” encounter in his office.
“Anyone who wants to take my place must spell out their intentions, I‘m asking for clarity,” he told a news conference at which he laid out a package of reforms he will propose to a meeting of the centre-left Democratic Party (PD) on Thursday.
Days of repeated criticism by the ambitious and fast-talking Renzi of the Letta government’s failure to lift the economy out of its worst slump since World War Two have piled growing pressure on the prime minister to stand aside.
Thursday’s meeting of the PD’s 140-strong leadership group, called to decide whether the largest party in the coalition will continue to support the prime minister, is now set for an open showdown between Letta and his party leader Renzi.
The victory of the 39-year-old mayor of Florence in a PD leadership primary in December has shaken up politics in Italy and complicated life for his party colleague Letta, who has nothing like his rival’s voter appeal and telegenic presence.
A low-key moderate with roots in the old Christian Democrat party, Letta was appointed in April to lead a cross-party government patched together after last year’s deadlocked election.
Since then, he has kept the unwieldy coalition together and won approval from Italy’s international partners by keeping a lid on public finances but has struggled to pass wider reforms of the economy or the dysfunctional public administration.
The latest ructions in Italy, the euro zone’s third-largest economy, have so far left financial markets unperturbed, with the risk premium on Italian 10-year bonds over German Bunds around 200 basis points, comparable with levels seen before its bonds were sucked into the euro zone debt crisis in 2011.
But continual uncertainty has held back any radical effort to revive an economy that has shrunk by more than 9 percent since 2007, sending unemployment to record levels not seen since the 1970s.
Renzi, a centrist who does little to conceal his disdain for his party’s traditional left wing, was described by party sources as furious after Letta’s remarks but more determined than ever to push for a change.
He has talked in the past of holding new elections but is well aware that until the electoral law that produced last year’s stalemate is changed, any new vote would almost certainly produce another impasse.
President Giorgio Napolitano, the 88-year-old head of state who would have to call a new election if Letta loses the support of his party and no new government can be formed, brushed off talk of a snap poll, saying: “Let’s not talk nonsense”.
In keeping with his image as a dynamic moderniser impatient with the rituals of old-style politics, Renzi arrived for his meeting with Letta at the wheel of a blue Smart car.
But the speculation of a handover is more reminiscent of the short-lived revolving door governments of the past and underlined the long tradition of infighting and backstabbing which has marked the left in Italy.
“If this is Renzi’s revolutionary new idea of politics then frankly he’s a great disappointment,” said Mara Carfagna, parliamentary spokeswoman for Silvio Berlusconi’s centre-right Forza Italia party.
Opinion polls suggest that Italian voters do not want a change of premier without elections, with a survey in Wednesday’s La Stampa suggesting that no more than 14 percent wanted to see Renzi taking over before a new vote.
Whether the small New Centre Right party that supports Letta would be willing to remain in government with the much more pugnacious Renzi remains to be seen, and Italian newspapers speculated that he may be aiming for a new coalition with the small Left Ecology Freedom party.
“We are evaluating the options,” Regional Affairs Minister Graziano Del Rio, a close ally of Renzi, told Canale 5 television. “It will depend on the wishes of the political forces that support this government.”
A drive by Renzi to reform the electoral law, a measure touted by all sides as a necessary step to creating stable government, has already encountered problems in parliament and disagreement over the scores of amendments that have been filed has pushed a scheduled debate into next week.
To add to the uncertainty, Forza Italia, now in opposition, openly questioned whether the electoral reform proposals agreed between Renzi and Berlusconi would continue if the PD party secretary also assumed the role of prime minister.
In his remarks on Wednesday, Letta pledged to beef up Italy’s patchy welfare system, help job creation and free up 30 billion euros in resources over the coming two years to reduce taxes. But with his future in the balance, it remains unclear whether his proposals will ever see the light of day.