By Roberto Landucci
ROME (Reuters) - Italian President Giorgio Napolitano issued a severe rebuke on Thursday to Silvio Berlusconi and ruled out taking any action to stop his conviction for tax fraud after allies threatened to walk out of parliament over his legal problems.
Italy has lurched closer to a crisis since Berlusconi, a partner in Prime Minister Enrico Letta's coalition government, was sentenced last month to four years in prison, commuted to a year under house arrest or in community service, for tax fraud.
In an unusually strongly worded statement, Napolitano, who would have to decide whether to dissolve parliament or try to build a new coalition if the government fell, said the "disturbing" threat by Berlusconi's People of Freedom (PDL) party would undermine the functioning of parliament.
He said it would be especially worrying if its aim was to pressure him into calling new elections.
"There is still time, which I hope is used well, to find a way to express - if this is what the PDL parliamentarians want to do - their political and human empathy for the PDL president without putting at risk the functioning of the two houses of parliament," he said.
He dismissed as "absurd" Berlusconi's accusations that judges who have convicted him of tax fraud aimed at a "coup d'etat" and ruled out any intervention against the verdict by Italy's top court.
Late on Wednesday, Berlusconi's allies made their latest threat to bring down the government, saying they would resign if a special Senate committee meeting on October 4 voted to strip the 76-year-old media tycoon of his seat in the upper house.
With the government working on next year's budget, Letta has said that Italy needs political stability while it struggles to emerge from more than two years of recession, rein in a 2-trillion-euro ($2.7-trillion) public debt, and bring its budget deficit under control.
As the latest bout of political brinkmanship preoccupied Rome, rumors swirled that Italy faced a renewed downgrade of its government debt, sending the Milan bourse lower and pushing up borrowing costs on benchmark 10-year bonds.
How serious a threat the latest move presents is difficult to assess given a series of contradictory signals from Berlusconi's allies in parliament, who are divided between a faction of hardliners and more conciliatory doves.
"IF THIS MESS CONTINUES, I COULD RESIGN"
Maurizio Gasparri, deputy floor leader in the Senate for Berlusconi's party, now renamed "Forza Italia" (Go Italy!), said the decision to resign had been "by acclamation".
However Constitutional Reform Minister Gaetano Quagliariello, a Forza Italia moderate, said the center-right had no joint commitment to stand down. "We didn't vote for any resignation yesterday. If you're going to resign, you do it, you don't announce it," he told reporters.
Letta's center-left Democratic Party (PD) said the threats could undermine the government as it grapples with problems ranging from strained public finances to the fate of big Italian firms including Telecom Italia and national carrier Alitalia, both embroiled in complex takeovers.
"Unfortunately, this back and forth with threats weakens an equilibrium which is already very delicate," Luigi Zanda, Senate floor leader of the PD, told the daily Corriere della Sera.
The constant tension within the coalition has hobbled reform efforts and wasted weeks in wrangling over issues, including Berlusconi's political future, while other urgent issues, notably the slipping budget deficit, require attention.
The next battle looms as early as Friday when cabinet is due to agree potentially painful measures to avert a looming rise in sales tax, another issue over which the center-right has threatened to bring the government down.
The government must find around 1 billion euros to finance the measure while also trimming another two billion from the budget to bring the deficit under the European Union limits.
Pressure on the coalition from Forza Italia rose hours after Letta sought to reassure international investors in New York that Italy was a stable and reliable partner.
Without citing its sources, the Corriere della Sera daily said that Letta had informed Angelino Alfano, the deputy prime minister and party secretary of Forza Italia: "Angelino, if this mess keeps up, I could resign from here."
Financial markets have shown none of the panic seen during previous government crises in 2012 or at the height of the euro zone debt crisis in 2011. But borrowing costs have ticked up during the latest bout of uncertainty. On Thursday, yields on Italy's 10-year bonds rose by six basis points.
($1 = 0.7403 euros)
(Additional reporting by Steve Scherer; Writing by James Mackenzie; Editing by Sonya Hepinstall)