UPDATE 5-Monti govt at risk after Berlusconi withdraws support

* Monti government survives two confidence votes, still at

risk

* President urges calm

* Centre-right withdraws support

* Berlusconi comeback plan criticised by minister

ROME, Dec 6 (Reuters) - Silvio Berlusconi's party withdrew

its support for Prime Minister Mario Monti on Thursday, raising

the risk of a snap election in Italy, but President Giorgio

Napolitano said he would work to avoid a crisis and there was no

need for alarm.

The centre-right People of Freedom (PDL) party walked out of

a Senate confidence vote on a package of economic measures and

abstained in a separate confidence vote in the lower house

following criticism of Berlusconi by a senior minister.

Monti's government survived comfortably but the risk it

could fall remained as tensions rose between the parties that

have backed the technocrat government over the last year.

Head of state Napolitano, who makes the final decision on

whether to call an election, said there was no need for alarm on

international markets and Italy's institutions were strong.

"There are pre-electoral political tensions that even

outside Italy can be understood without creating alarm about the

institutional strength of the country," Napolitano said.

PDL secretary Angelino Alfano said the party had not wanted

to bring the government down on Thursday but would decide over

the next few days whether to do so. "If we had wanted to make it

fall, we would have already today given a vote of no

confidence," he told reporters.

If the government does fall, an election would likely be

called only a few weeks earlier than the expected date in early

March, but such a development would upset investors nervous

about what will follow Monti.

With all parties now clearly in campaign mode, Alfano said

that Berlusconi had told him of his intention to run following

strong indications on Wednesday that he would return to the

frontline as the PDL election candidate.

The PDL move on Thursday followed comments by one of Monti's

ministers saying Berlusconi's return could be bad for Italy.

Napolitano said a turbulent end to the five-year legislature

must be avoided so Monti's government could complete its

programme and the prime minister said he would await the

president's judgment on Thursday's political drama. The

president will meet Alfano on Friday.

Napolitano has previously said he will not call elections

until parliament has approved a package of economic reforms.

The political confusion helped drive up Italian bond yields

but the impact was relatively contained. The premium investors

demand to hold Italian 10-year BTP bonds rather than lower-risk

German Bunds widened to 330 basis points, having fallen below

300 points earlier in the week.

MARKETS WORRIED

International markets are worried about what will happen

after Monti steps down. The respected former European

Commissioner has restored confidence in Italy since he took over

a year ago from the flamboyant and scandal-plagued Berlusconi.

The centre-left Democratic Party (PD), which is the main

element with the PDL of a cross party alliance sustaining Monti,

indicated it could ask Napolitano to dissolve parliament if the

government could not count on the support of Berlusconi's party.

The conflict underlined the deep uncertainty in Italian

politics before next spring's election and weakened bond prices,

which have come back under control since reaching critical

levels before Monti's takeover.

Berlusconi's statement on Wednesday suggested that he wanted

to exploit public anger over austerity measures to revive the

fortunes of the party he founded and bankrolled, which has

slumped badly in opinion polls over the last year.

The former premier said the situation was much worse than

when he stepped down and Italy was on the edge of an abyss.

In a television interview early on Thursday, Industry

Minister Corrado Passera expressed strong reservations about a

return by the 76-year-old billionaire, who left office last year

as investors despaired of him addressing the country's economic

crisis and Italy seemed headed for a Greek-style crisis.

The stand-off deepened the confusion surrounding the

election and threatens to open a severe political crisis in the

euro zone's third largest economy.

Berlusconi accused Monti's government of dragging Italy into

an "endless recessive spiral". Passera retorted that most of

Italy's deep economic problems were the result of a decade of

poor management.

Berlusconi, who was in power for most of the past 10 years,

faces deep divisions within the PDL, which is split between

loyalists opposed to Monti and other factions, including many

who want to continue backing the government's reform agenda.

Former Foreign Minister Franco Frattini, a leading PDL

moderate who wants Monti to come back as premier after the

election, defied party orders to abstain in the lower house

vote, together with at least three other deputies.

Analysts say the party could easily fall apart before the

election, leaving a void on the centre-right which has already

lost substantial ground to the populist 5-Star Movement of

comedian Beppe Grillo which is second in opinion polls after the

centre-left.

Disillusioned PDL supporters are also believed to be a

substantial bloc of the up to 50 percent of voters who say they

would abstain in an election or have not made up their minds.

Berlusconi's indecision has further undermined his party,

whose support is now at less than half the level that won it a

landslide election victory in 2008.

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