By James Mackenzie
ROME (Reuters) - Silvio Berlusconi's conviction on charges relating to underage prostitution has opened an unpredictable chapter for Italy's fragile coalition government just as signs of uncertainty have returned to euro zone financial markets.
The 76-year-old leader of the centre-right People of Freedom (PDL) party, already fighting a four-year jail sentence and a ban on holding public office for tax fraud, meets Prime Minister Enrico Letta for discussions on Tuesday.
His furious reaction to the "incredible" seven-year sentence handed down on Monday for paying for sex with former teenaged nightclub dancer Karima El Mahroug, alias "Ruby" and for abuse of office to cover up the affair, suggests a rocky time ahead.
Although he is not expected to withdraw support for Letta's left-right coalition of traditional rivals, at least for now, the tensions that already exist over economic policy are likely to widen, bringing a risk that even modest reforms get stalled.
Berlusconi's PDL and Letta's centre-left Democratic Party (PD) are already at odds over the centre-right's demand for the scrapping of a housing tax introduced by former prime minister Mario Monti, despite pressure on strained public finances and the need to keep within European Union borrowing limits.
Andrea Mazziotti, justice affairs spokesman for Monti's Civic Choice party, which also backs Letta's government, said the policy disagreements could be used as a weapon in the battle over Berlusconi's future.
"It's obvious that he would never bring the government down using this as a justification but there are already those in the PDL who are preparing the excuse of economic policy to fight Letta," he said.
While the creaking wheels of the Italian justice system are expected to guarantee at least two years of appeals during which the "Rubygate" sentence will remain in suspension, Berlusconi faces other legal battles that could be an even greater threat.
The tax fraud conviction, linked to his Mediaset broadcasting empire, could see him driven from parliament and barred from holding public office if the final appeal, expected by the end of the year, goes against him.
Judges in Naples are also due to hold a preliminary hearing this week on charges that Berlusconi bribed a senator to change sides to undermine the centre-left government of then-prime minister Romano Prodi in 2006.
Letta, grappling with Italy's longest postwar recession and a youth unemployment rate of more than 40 percent, has kept quiet so far, unwilling to risk the future of a government that was born only after weeks of bitter wrangling.
But the latest bout of uncertainty has come at a particularly difficult time, just as a period of stability on financial markets seems to be drawing to an end.
Investors are on edge over the U.S. Federal Reserve's indications that it will withdraw monetary stimulus programs. An auction of two-year Italian bonds on Tuesday saw borrowing costs at their highest level since September.
That is still some way off the genuinely dangerous levels seen at the height of the euro zone crisis in 2011 but enough to underline the risks posed by more political uncertainty.
President Giorgio Napolitano, who oversaw the formation of the Letta government following last February's deadlocked national elections, warned on Tuesday that "political agitation" was at a danger level and called for calm.
But the parties themselves are badly fractured, with the PD facing growing strains over whether to maintain its alliance with the scandal-plagued Berlusconi and the PDL increasingly angry at what it sees as persecution by leftwing magistrates.
"No one understands, not Letta, not Napolitano nor the left the moral and political drama we are going through, we parliamentarians in the PDL," Sandro Bondi, a senior party official, said in a statement on Tuesday. "We all feel the need to do something, we're just not sure what."
Longtime Berlusconi enemies, such as former anti-corruption magistrate Antonio Di Pietro, are gnawed by a suspicion that the man who has dominated Italian politics for the past two decades will engineer yet another escape.
"It's obvious that the next move will be the usual, specially tailored personal law to save this individual from his legal problems," he wrote in his blog.
So far, there has been no suggestion of any serious move in this direction and the uproar that would cause would probably bring down any government that included the centre-left.
But any hopes of more substantial reforms requiring concerted political support may be just as unrealistic.
(Editing by Gareth Jones)