Premier Silvio Berlusconi's government failed to come up with immediate growth measures to show a summit of world leaders, sending Italy's borrowing rates to dangerous new highs Thursday and igniting talk of a possible government collapse.
Italy's respected president, who would be responsible for choosing an interim government if Berlusconi's did fail, was holding talks with party leaders in a search for possible alternatives.
Berlusconi's weakening grip on his majority was evident in a Cabinet meeting that lasted late into the night Wednesday amid reports of discord with his finance minister, Giulio Tremonti. Berlusconi wanted the Cabinet to agree to enforce some emergency economic reforms as a decree, so they could take immediate effect, including selling government property and privatizing some local public services.
Instead, he headed Thursday to a summit in Cannes of the Group of 20 wealthy nations with only proposed legislation, requiring approval by a divided Parliament.
At Cannes, Berlusconi pledged to other eurozone leaders that he would put the measures to a vote of confidence within the next two weeks. If those measures fail, Berlusconi would be forced to step down.
Berlusconi has insisted that his government will survive its mandate until 2013, but even his coalition partners, the Northern League, have cast doubt on that.
"It is difficult to avoid the impression that this government's time is numbered in days, or weeks, and that the legislature will finish at the beginning of 2012," the Corriere della Sera newspaper wrote in a front page editorial.
"Berlusconi has become a puppet in the Italian political theater," the speaker of the lower house and former Berlusconi ally, Gianfranco Fini, told state TV.
He urged Berlusconi to show his leadership by seeking a broad alliance to see the country through the crisis.
Market reaction to Italy's political deadlock was withering. Italy is the eurozone's third largest economy, far too large to be bailed out like Greece, Portugal and Ireland have been. Yet Italy has a debt of euro1.9 trillion ($2.6 trillion), or 120 percent of GDP, second only to the debt ratio in extremely troubled Greece.
The yield on Italy's 10-year bonds jumped to 6.4 percent on the secondary market at one point Thursday, 4.62 percentage points higher than the rate on the German equivalent bund. Speculation that the European Central Bank was back in the markets buying up Italian bonds took the yield back down to 6.17 percent.
The ECB has been buying up Italian bonds for weeks in an attempt to keep borrowing rates at manageable levels. Borrowing costs of 7 percent or more are widely considered unsustainable, which could cause a default on public debt.
President Giorgio Napolitano met with leaders of Italian parties Thursday to gauge the political situation and seek alternatives. If the government falls, Napolitano would decide if a technical government or someone else in the center-right would run the country before new elections.
Napolitano sought to reassure Italy's partners and the markets, saying that both the majority and the opposition "are aware of the weight of the problems that Italy must confront with urgency." He said the next parliament vote would allow him to better evaluate the political situation.
The head of Berlusconi's party, Alfonso Alfano, insisted after meeting with Napolitano that Berlusconi has a majority to continue to 2013. But even he addressed the possibility of the government's failure, saying that new elections, and not a technical government, should be next.
Berlusconi's influence frayed further when six of his Party of Freedom (PDL) lawmakers signed a letter saying they would no longer support him in parliament if he did not seek to build a national unity government.
"The current government does not have the consensus in parliament to achieve the difficult agenda of commitments taken in front of European institutions, the parliament and the Italian people," they wrote.
Later, another two of his lawmakers defected to a centrist party.
The government has been further weakened by reports of discord on emergency measures between Berlusconi and his finance minister.
After raising expectations of a decree, the government announced legislation reportedly after Napolitano suggested they would enjoy more legitimacy if passed by parliament. They include divesting government-owned real estate, privatizing local public companies, encouraging investment in infrastructure and liberalizing the labor market.
The measures must be approved by the end of the year, the government said in a statement.
They were outlined to the European Union last week after Italy and Berlusconi came under pressure from other eurozone governments and financial markets to find ways to boost the country's anemic growth.
However, doubts have been growing that Berlusconi has the political muscle to push such reforms through.