Italy cabinet meets amid division over pensions

Following explicit calls for action at the weekend from German Chancellor Angela Merkel and French President Nicolas Sarkozy, Berlusconi is due to propose reforms to the pension system so far been resisted by his partners in the Northern League.

On Monday, parliamentary group leader Marco Reguzzoni repeated that the League was firmly against any changes that would raise the pension age to 67 from 65, a step urged by institutions including the Bank of Italy.

"The League has always been against any pension reforms," Reguzzoni told Italian television. "We've made alternative proposals which we will discuss in cabinet."

EU leaders have become increasingly alarmed at the government's erratic response to the crisis, which could threaten the entire euro zone if Italy does not manage to shore up its finances and regain the confidence of financial markets.

However, touching the pension system presents a formidable challenge to a weakened government that has been riven by internal divisions and distracted by a variety of scandals involving Berlusconi and several other ministers.

Under the current system, the basic pension age for men is 65, a level to which the women's pension age is being gradually increased. Many Italians however have a form of length-of-service pension which allows them to retire earlier, based on the number of years they have paid contributions.

League leaders have so far resisted major pension reforms and overcoming their objections will be vital for the 75-year-old prime minister, who depends on the pro-devolution regional party for his narrow but so far stable parliamentary majority.

Berlusconi's struggling center-right government has announced a succession of reforms and budget balancing measures since August when market pressure forced the European Central Bank to support Italian bonds by intervening in the market.

None of the plans, including a commitment to balance the budget by 2013, has succeeded in convincing markets and Italian bond yields are now up at 5.9 percent, close to the levels they reached when the ECB began its bond buying program in August.

Economy Minister Giulio Tremonti has promised a decree to boost growth with measures such as opening up closed professions and cutting red tape and raising revenue though steps such as privatizations and a possible wealth tax.

The decree has been repeatedly delayed following deep differences between ministers over key parts of the package.

(Reporting by James Mackenzie; Editing by Alastair Macdonald)