By Paolo Biondi
ROME (Reuters) - Silvio Berlusconi's center-right People of Freedom party pledged on Friday not to trigger a disorderly crisis that could alarm financial markets as Italy began to look forward to an election in the first few months of next year.
People of Freedom (PDL) secretary Angelino Alfano told parliament that the party's withdrawal of support from Prime Minister Mario Monti in two confidence votes on Thursday had shown its disapproval without bringing down the government.
"Yesterday we did not give a vote of no confidence because we consider the experience of the Monti government has come to an end but we don't want to send the institutions and the country into chaos," Alfano said.
The PDL is expected to allow budget measures in the so-called Stability Law to pass when it comes before parliament for final approval some time before Christmas, ensuring that deficit reduction goals are maintained and the budget is approved.
Italian President Giorgio Napolitano said in a statement he would meet Monti as soon as possible to discuss the implications of the PDL's decision after he spoke to party leaders on Friday.
Napolitano, who is responsible for calling an election which must take place no later than April, said he believed a "constructive and correct path" could be found in the interests of the country and its international image.
Pier Luigi Bersani, head of the center-left Democratic Party, which is leading in opinion polls, repeated that his party would continue to support Monti.
Following several weeks of relative calm, which saw market confidence improve and Rome's borrowing costs come down steadily, investors have once again been ruffled by Italy's political troubles, although reaction has not been extreme.
The spread or difference between yields on Italian 10-year bonds and German counterparts that are considered less risky has widened from just over 300 basis points to 323 basis points on Friday although it is still well off a peak of 553 points at the height of the crisis last year.
However the standoff has refocused market attention on Italy's post-Monti government, and how it will deal with reforming the recession-hit economy, a fact underlined by ratings agency Standard & Poor's late on Friday.
The agency highlighted concerns over the election and said there was "uncertainty around whether the next government coalition would remain committed to the structural reform agenda" pursued by Monti.
After changing his mind repeatedly in recent weeks, Berlusconi indicated on Wednesday that he was likely to seek a fifth term as prime minister and lead his divided party in the election now expected to be held by early March.
NO CHANGE ON ELECTORAL LAW
Berlusconi is expected to focus on attacking Monti's austerity policies after he accused the former European Commissioner of dragging Italy "to the brink of a precipice".
The decision to break with Monti's technocrat government, which the PDL has backed in parliament since it was appointed last year, was widely interpreted as an attempt by Berlusconi to hold the party together in the face of falling approval ratings.
It also effectively ends hopes of a change to the current much-criticized electoral law and means next year's vote is likely to be held under a system which analysts say could allow the PDL to retain significant strength in the upper house.
For that to happen, it would still have to patch up an alliance with its former coalition partners in the regionalist Northern League party, which has been struggling to overcome a damaging corruption scandal under new leader Roberto Maroni.
Two opinion polls published on Friday showed that the Democratic Party had increased its lead over political rivals, while Monti's approval ratings had dropped.
(Additional reporting by Jennifer Clark in Milan; Writing by James Mackenzie; Editing by Stephen Powell)
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