By Paolo Biondi
ROME (Reuters) - Italian Prime Minister Enrico Letta won a confidence vote on the 2014 budget, reinforcing his coalition government a day before the Senate is expected to ban center-right leader Silvio Berlusconi from parliament over a tax fraud conviction.
Berlusconi's Forza Italia party voted against the so-called Stability Law, which it described as "completely mistaken, with neither head nor tail", formalizing its break with Letta after seven months in his left-right coalition.
The measure passed in the Senate shortly after midnight with a majority of 171 to 135, helped by the votes of rebel senators who broke away from Berlusconi earlier this month.
However, the decision by the biggest party on the center-right to pull out of the unwieldy coalition formed after February's deadlocked election underlined the political instability facing the euro zone's third biggest economy.
"From today we are in opposition and the grand coalition is over," said Renato Brunetta, lower house leader of Berlusconi's center-right party, now rebranded as Forza Italia, the name of the movement the billionaire media tycoon used to enter politics 20 years ago.
The vote came less than 24 hours before the Senate is due to decide whether to strip Berlusconi of his seat in the upper house following his conviction in August of being at the center of a vast tax fraud conspiracy at his Mediaset television empire.
With both the center-left Democratic Party and the anti-establishment 5-Star Movement set to vote against Berlusconi, an expulsion appears certain - with parliamentary guerrilla warfare likely to follow.
Paolo Romani, Forza Italia floor leader in the Senate, described the Wednesday vote as "the funeral of democracy", but he said his party would still be able to set its stamp on parliament even in opposition.
"Anyone who thinks Forza Italia is no longer relevant for the coalition is making a big mistake," he said.
Speaking at a joint news conference with Russian President Vladimir Putin in the northern eastern city of Trieste, Letta said that Italy, still stuck in its worst postwar recession, desperately needed stability to reform its stagnant economy.
"For us to get back to growth, Italy needs to avoid chaos and that's what I've been working for the past seven months and it's what I'm working for now," Letta said.
Confidence votes, which limit the scope for time-consuming amendments, are regularly called to speed legislation. Tuesday's Senate vote on the first reading of the budget was not final approval of the bill, which must be passed by the end of the year.
With the European Central Bank guaranteeing market stability, Italy has not seen the kind of turbulence it went through at the height of the euro zone debt crisis in 2011, but the prospect of disruption has caused alarm outside the country.
European Commission President Jose Manuel Barroso, a leading member of the center-right European People's Party, called Berlusconi in a last-minute bid to try to prevent a break with Letta's government, Forza Italia lawmakers said.
With only hours to go before the vote in the Senate, officials were making last-minute corrections to the text which has been widely criticized for not going far enough to cut spending and overhaul Italy's battered public finances.
As well as cuts to the top level of pensions, the budget will trim the so-called "tax wedge", the difference between labor costs to an employer and a worker's actual take home pay, although it has not gone as far as business groups have demanded in cutting payroll costs.
It will also replace the hated IMU housing tax on primary residences with a new set of property taxes grouped under the title IUC which covers both local service taxes and taxes on secondary residences and other property.
Italy has pledged to contain its deficit within European Union limits of 3 percent of gross domestic product. The European Commission has warned that the budget may not prevent the public debt, already one of the heaviest in the euro zone at over 133 percent of GDP, from rising further.
(Additional reporting by Naomi O'Leary and Catherine Hornby; writing by Steve Scherer and James Mackenzie; editing by Ralph Boulton and Jackie Frank)