By Paolo Biondi
ROME (Reuters) - Allies of Silvio Berlusconi stepped up pressure on the shaky coalition government of Italian Prime Minister Enrico Letta on Wednesday, threatening to bring it down if the Senate votes to expel the former premier following his conviction for tax fraud.
The fate of Letta's government has been in the balance since last month when Berlusconi, the leader of Italy's center-right, was convicted for being at the center of a giant tax fraud scheme at his Mediaset broadcasting empire.
Senators from Berlusconi's People of Freedom party (PDL) met on Wednesday to discuss tactics and said the government could not continue if the Senate decides to strip Berlusconi of his seat in the upper house.
Asked if Berlusconi's expulsion would mean the government's collapse, PDL Senator Altero Matteoli replied: "Of course."
For weeks, the billionaire media tycoon's supporters have alternated conciliatory signals with threats to pull out of the coalition with the center-left patched together in April after deadlocked elections which left no party able to govern alone.
Italian newspapers on Wednesday carried unsourced reports that Berlusconi had become more pessimistic about his chances of avoiding expulsion and was ready to scupper the government.
"It was always difficult to imagine cooperation between parties that have different positions on so many issues," Maurizio Gasparri, a Berlusconi loyalist and the deputy speaker in the Senate told SkyTG24 television.
He warned that the center-right could not continue to support Letta if a special Senate committee on parliamentary eligibility which is due to meet on Monday on whether to expel Berlusconi became "a political firing squad".
A definitive decision could still be some way off because the Senate would still have to vote in a full sitting before Berlusconi could be expelled.
Italian stocks, which have fluctuated sharply over the past weeks as press headlines have announced either the imminent collapse of the government or its long-term survival, were down by 1.8 percent, with shares in Mediaset down 3.5 percent.
However the risk premium demanded to buy Italian 10 year government bonds instead of safer German Bunds, one of the main gauges of wider investor sentiment, stood at 245 basis points, still well down from levels over 260 points seen last week.
With Italy still stuck in recession and struggling to contain its public debt, the tensions have re-awakened memories of the turmoil that engulfed the euro zone in 2011 when Berlusconi's last government was forced from office amid fears of a Greek-style debt crisis.
Letta has repeatedly insisted he does not feel threatened by Berlusconi's legal battles and for the moment, signs of tension in the government itself have eased after last week's deal on scrapping the unpopular IMU housing tax.
"We're working on the basis of the government carrying on," one PDL minister told Reuters.
Behind the scenes, lawyers have been working on options including seeking a pardon from President Giorgio Napolitano.
They have also appealed to have the law under which Berlusconi may be expelled from parliament declared unconstitutional and the center-right has pressed for the Senate committee on parliamentary eligibility to delay its decision until the constitutional court decides.
The center-right says the law passed last year, making politicians convicted of offences carrying a sentence of more than two years ineligible for office, should not apply to Berlusconi because the actions for which he was convicted date from before it was passed.
The center-left Democratic Party (PD) and Beppe Grillo's anti-establishment 5-Star Movement have both rejected talk of delaying the committee decision and said they would vote to expel Berlusconi if the issue gets to a full vote. Together they have easily enough votes to oust Berlusconi.
Expulsion from the Senate would be a blow but he could still lead the PDL from outside parliament although he would no longer enjoy the immunity from arrest enjoyed by lawmakers.
(Writing By James Mackenzie; Editing by Andrew Heavens)