By James Mackenzie
ROME (Reuters) - Italian Prime Minister Silvio Berlusconi was forced to issue a statement backing Economy Minister Giulio Tremonti for the third time in just over a month, following fresh talk of a breakdown in relations.
In a statement late on Tuesday, a day after a crushing local election defeat for the center right, Berlusconi said: "I reconfirm full confidence in Minister Tremonti and I am sure we will continue to work well together as we have up to now."
Berlusconi made the statement after Italian news agencies quoted him as declaring that he would push on with a tax reform and saying of his economy minister: "It's not Tremonti who decides, he proposes."
With the ruling PDL party scrambling to recover its balance after the election shock, the comments were widely taken as a fresh sign of tension between Berlusconi and Tremonti, often seen as a potential successor to the 74-year-old prime minister.
Italian media, including the Berlusconi-friendly Libero daily, reported rumours that Tremonti had threatened to resign over the comments, which reopened longstanding speculation of a deep rift between the two.
Berlusconi has already been forced to issue two similar statements in recent weeks about Tremonti, who is generally credited with steering Italy through the financial crisis in relative safety.
The latest signs of tension came after an election that cost the center right control of a string of cities including Italy's financial capital Milan.
The defeat has raised doubts over the long-term stability of Berlusconi's center-right government and its ability to carry out fresh reforms of the stagnant Italian economy.
PARTY SHAKE UP
On Wednesday, Berlusconi announced changes aimed at strengthening the leadership of the PDL, a party based almost entirely around himself, which few believe will survive his eventual departure from politics.
Justice Minister Angelino Alfano, also seen as a possible Berlusconi successor, was named as secretary-general of the party as it looks to establish a more stable and focused structure before the next parliamentary election scheduled for 2013.
Berlusconi has pledged to carry on with a program of tax, justice and economic reforms, so far sketched out only in very broad terms, but the problems facing Italy, the most sluggish economy in the euro zone over the past decade, are mounting.
Last month, ratings agency Standard and Poor's cut its outlook on Italy to "negative" from "stable," citing potential political gridlock as a hindrance to cutting a public debt level that stands at almost 120 percent of gross domestic product.
Politicians on all sides have been acutely aware of the need to contain the debt to ward off financial market turbulence and Tremonti's tight grip on public spending has been seen as key to containing Italy's relatively modest deficit.
But many in Berlusconi's party have been irritated by his dominance of spending decisions in cabinet and his closeness to the prime minister's often unruly coalition allies in the Northern League.
The daily La Repubblica reported on Wednesday that Tremonti was preparing plans for a tax reform that would cut the two lower bands of income tax rates by 1 or 2 percentage points and lift VAT rates for non-basic goods by 1 or 2 points.
The plan appears less ambitious than many have urged but Tremonti believes it is the most a heavily indebted country such as Italy can afford, the newspaper wrote.
(Editing by Jon Boyle)