By James Mackenzie
ROME (Reuters) - Italy's Prime Minister Enrico Letta won a confidence vote in the Senate on Wednesday, confirming his government's majority after promising sweeping reforms and urging lawmakers to back him or risk chaos.
Letta told parliament Italy had avoided reforms for 20 years and could no longer afford to delay, with protests across the country this week underlining the bitter public mood after years of painful attempts to squeeze costs and boost revenues.
"I will do everything I can. I won't give in to those who say the chaos is too much and we can't do anything," he said, pledging to combat a growing tide of political disillusion and hostility to the European Union.
Letta, backed by the center-left Democratic Party and smaller centrist and center-right groups, won the vote by 173 votes to 127 following an even more comfortable victory in the Chamber of Deputies earlier on Wednesday.
The confidence votes were called to confirm Letta's majority after center-right leader Silvio Berlusconi pulled his Forza Italia party out of the ruling coalition last month.
Letta pledged to fight "like a lion" to tackle problems including youth unemployment running at more than 40 percent.
After years of recession and stagnation, the economy is now smaller than it was more than a decade ago and obstacles range from rampant corruption and a discredited political system to a level of tax evasion which the head of Italy's tax authority said this week was incompatible with a democratic state.
On Wednesday police shut down parts of Rome with hundreds of protesters gathering near parliament, shouting "Thieves! Thieves!".
Letta said the next 18 months would be devoted to a broad package of institutional reforms aimed at creating a stable basis for economic growth which he said should reach 1 percent in 2014 and 2 percent in 2015.
These targets are considered optimistic by virtually all independent forecasters. The euro zone's third largest economy has grown by 2 percent in just one of the last 12 years.
As well as a new electoral law and measures to untangle the conflicting web of powers between different levels of the administration, Letta promised to overhaul parliament to remove the Senate's power to vote no confidence in the government.
The upper house would become a review chamber linked to the regions instead of an exact counterweight to the lower house, removing a major cause of Italy's chronic political stalemate.
On the economic front, he gave little detail but promised to cut Italy's public debt, the second highest in the euro zone as a proportion of the overall economy. In addition, he would lower taxes on families and companies, reduce unemployment and boost public investment, with a package of measures to attract foreign investment due to be approved by cabinet on Friday.
Many of these goals echo those made when he took office in the spring, but so far a quarrelsome ruling coalition has hindered progress.
Letta promised privatizations and said the government would consider allowing employees to buy shares in the postal service and other public companies.
Berlusconi, now banned from parliament after a tax fraud conviction, ended seven months of cooperation with the center left when he moved into opposition and is already fiercely attacking the government.
Letta has said he expects the government to survive until at least 2015 but his task has been complicated by Sunday's election of the 38-year-old Matteo Renzi as head of the PD.
Renzi, the ambitious young mayor of Florence, is expected to lead the PD into the next election. He has said he wants to set his stamp more clearly on the government's agenda and some believe he would like to push for an election more quickly.
However a source in Renzi's inner circle said on Wednesday the two center-left leaders were in accord over the next steps.
Letta said a formal coalition pact setting out priorities for 2014 should be prepared in the next few weeks but the government had become stronger since Berlusconi moved to the opposition benches.
He had already won two confidence votes in parliament with his reduced majority, most recently over the 2014 budget law, still working its way through parliament and requiring approval before the end of the year.
Italy has enjoyed a respite from the financial market tensions that have plagued it in recent years. The main barometer of market confidence, the difference between yields on Italian 10-year bonds and safer German Bunds, fell to its lowest level in more than two years this week.
On Tuesday, national statistics agency Istat reported a rise in industrial output for October and revised third-quarter gross domestic product to show zero growth after two years of steady decline.
However, the protests by a loose movement led by farmers and truckers in many Italian towns and cities this week have underlined public anger over policies to try to improve public finances and keep them within European Union rules.
(Additional reporting by Gavin Jones, Silvia Ognibene and Cristiano Corvino; editing by Andrew Roche)