By Philip Pullella
ROME (Reuters) - A rare climb down by Italian Prime Minister Silvio Berlusconi over a law that critics say was tailor-made to protect his business interests has debilitated him and points to growing isolation within his own center-right.
After a string of humiliating defeats in local polls and a referendum, the episode further strained Berlusconi's relations with his key coalition partner the Northern League, the party guaranteeing his political survival.
"The men who always stood by him in difficult predicaments like this have abandoned him, one after another," said Marcello Sorgi, a leading political commentator for La Stampa newspaper.
Commentators spoke of a "poisonous atmosphere of suspicion" inside the prime minister's office and said Berlusconi had been forced to do an embarrassing about-face, realizing he no longer had the automatic support of some of his closest ministers.
In a surprise move on Tuesday night, Berlusconi withdrew the law, which would have directly benefited his Fininvest financial holding company.
It would have suspended the 750 million euro ($1.09 billion) penalty that Fininvest was ordered to pay to rival conglomerate CIR in a dispute over the takeover of the publisher Arnoldo Mondadori Editore in the 1990s.
La Repubblica newspaper accused Berlusconi of "trying to transform the economic interests of one person into a law, while showing contempt for the common good."
The measure, which Berlusconi said made good sense for any business caught up in an economic downturn, was mysteriously slipped into a package of budget measures being evaluated by President Giorgio Napolitano.
LAST MINUTE PROVISION
According to some media accounts, the measure did not exist in the version drafted by the Treasury and sent to the prime minister's office, but appeared in the one that was delivered to the president.
Northern League leaders said they did not know anything about the provision, which appeared to have been slipped in at the last minute.
Umberto Bossi, the League's mercurial leader, was furious when he learnt of the provision and threatened to pull out of the government if Berlusconi did not withdraw it, newspapers reported.
"This is embarrassing to us," said Interior Minister Roberto Maroni, a prominent member of the League. In recent months as Berlusconi's approval ratings have gone down, League leaders have openly expressed concern that the party would lose support in its constituencies.
La Repubblica said Berlusconi had suffered a "double dishonor" because he had tried to do something he should not have and then failed to get away with it.
His critics have often attacked the prime minister for "ad personam" laws that they say are designed to help him in his various legal battles by creating special exemptions or conditions.
In the past, the League went along and Berlusconi seemed invincible, even though he is now facing a sex scandal and three fraud trials.
But in May, the center-right coalition suffered crushing losses in local elections, including in its northern power base, Milan.
In June, it suffered a humiliating defeat as Italians turned out in large numbers in referendums to repeal some Berlusconi-era laws, including one that granted him the right not to attend trials if he was busy on government business.
Berlusconi, a billionaire media tycoon, burst onto the political scene in 1994, when he was first elected prime minister and has led four governments since then. His current government has been in office since May 2008.
Speculation has been growing that -- as Berlusconi loses layer after layer of the political Teflon that has protected him all these years -- divisions within the center-right will almost certainly lead to early national elections before they are next due in 2013.
Even Libero, a newspaper that strongly supports Berlusconi and the center-right, had to swallow its pride and admit that that the Fininvest episode was a fiasco for the government.
"Poor us! What fools we look," its headline read.
(Editing by Elizabeth Fullerton)