By Roberto Landucci
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EU leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Berlusconi present firm plans for growth and reducing Italy's massive debt in time for a summit meeting in Brussels Wednesday.
However an emergency cabinet meeting late Monday ended without agreement after Berlusconi's coalition allies in the Northern League party refused to budge on their opposition to raising the pension age to 67 years.
Tuesday, as leaders from the coalition parties held a series of meetings in Rome, League leader Umberto Bossi said the disagreement could bring down the government and force early elections.
"The government is at risk," Bossi told reporters in parliament. "The situation is difficult, very dangerous. This is a dramatic moment," he said.
Berlusconi, mired in scandal and facing sliding approval ratings, has survived a series of confidence votes this year with the help of the League but analysts widely believe he cannot last much longer, predicting elections next spring.
The threat of a government breakdown comes as Italy takes center stage in the euro zone crisis with concerns mounting over its ability to stop a 1.8 trillion euro debt pile sliding out of control and putting the entire bloc at risk.
Yields on Italian 10-year bonds are just under 6 percent, not far short of levels they reached in August when the European Central Bank stepped in to cap Rome's borrowing costs by buying Italian bonds on the market.
As ministers scrambled to hammer out a deal in time for the Wednesday deadline, Infrastructure Minister Altero Matteoli said there would be no cabinet meeting but that Berlusconi might still have proposals to take to Brussels.
"If there is an agreement, the prime minister will take it to Europe. We can pass the provision later," he said.
Italy depends on ECB support to keep its borrowing costs at manageable levels but Berlusconi has reacted angrily to the pressure from Germany and France, widely seen as a humiliation. He issued a statement Monday declaring that no EU country was in a position to give lessons to its partners.
The perceived slight, notably at a news conference in Brussels where Merkel and Sarkozy exchanged ironic smiles and laughter following a question about whether they were reassured after meeting Berlusconi, has caused some bitterness in Italy.
Tuesday, President Giorgio Napolitano called on the government to show a credible commitment to reform but said expressions of mistrust at Italy's engagement were "inappropriate and unpleasant."
European Commission spokesman Amadeu Altafaj said the Commission had no intention of humiliating Italy but needed details on its reform plans.
Italy, once seen as safe from the crisis because of its relatively low deficit, a conservative financial system and high private savings, has passed a series of reforms since investors began to turn their fire on its debt in July.
But it has failed to convince markets worried that the deep divisions in the government will stymie painful reforms aimed at cutting the debt and boosting the stagnant economy.
Underlining the gloomy state of the economy, data Tuesday showed consumer morale in October fell to its lowest level since July 2008.
Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue though steps such as privatizations and a new wealth tax but the measures have been repeatedly delayed.
(Additional reporting by Giselda Vagnoni, writing by James Mackenzie, editing by Barry Moody and Jon Boyle)