Story highlights Italy's prime minister seeks support for a new government

Prime Minister Enrico Letta held crisis talks Sunday, will address parliament this week

Berlusconi's ordered his ministers to resign from the government

Center-left party may continue support if a planned sales tax increase is reversed

Enrico Letta, Italy's centre-left prime minister, is seeking urgently parliamentary support for a new government after centre-right leader Silvio Berlusconi pulled his ministers out of their five-month-old coalition, risking a financial market backlash.

Mr Letta held crisis talks on Sunday night with Giorgio Napolitano, head of state, who earlier said he would explore all alternatives before using his constitutional powers to dissolve parliament and call new elections. Mr Letta is expected to address parliament early this week.

The prime minister said he would present his government plan to parliament, possibly on Wednesday, and ask for a vote of confidence. Speaking on a television talk-show after his talks with the president, Mr Letta hinted he had hopes that some deputies on the centre-right would not toe the party line set by Mr Berlusconi.

Italy's uneasy grand coalition -- the product of inconclusive elections last February -- has been on the brink of collapse since Mr Berlusconi, a billionaire media magnate, lost his final appeal against a conviction for tax fraud on August 1 with the prospect of being banned from public office next month.

Mr Berlusconi roused his supporters celebrating his 77th birthday on Sunday by issuing a defiant call for elections "as soon as possible", slamming Mr Letta's Democrats for deciding to proceed with a rise in sales tax from October 1.

JUST WATCHED Disfunctional govt. the norm in Italy Replay More Videos ... MUST WATCH Disfunctional govt. the norm in Italy 02:36

But Mr Berlusconi's order to his five ministers to resign from the government -- decided with a small circle of party "hawks" on Saturday -- triggered a rare display of dissent. Four ministers expressed their misgivings, while Angelino Alfano, interior minister and nominally Mr Berlusconi's heir apparent, questioned whether he could work with their relaunched Forza Italia (Go Italy) if it was dominated by "extremist positions".

As other party stalwarts voiced their unease, Mr Berlusconi appeared to offer a way out of the crisis, issuing a statement saying the party could continue to support the government if it passed a "really useful" budget for next year and reversed the planned sales tax increase.

Elections in November would be unprecedented for Italy and risk derailing parliamentary approval of the 2014 budget, which the government is obliged to present first to the European Commission on October 15.

With Italy already in danger of failing to meet its 3 per cent budget deficit target this year, the European Union and the International Monetary Fund have repeatedly warned that political stability is needed to usher the eurozone's third-largest economy out of its longest postwar recession.

Fabrizio Saccomanni, finance minister, played down the risk that markets would react strongly. "I think the uncertainty connected to the government's instability has been to a large extent already factored in during the past few weeks," he was quoted as saying by Il Sole 24 Ore, a business daily.

However other officials fear that the yield gap between Italian and German 10-year debt could widen by as much as 50 basis points on Monday. There is also concern that Italy will face a downgrade by rating agencies.

Mr Letta could try to shepherd a minority government through the critical period of passing the budget, or try to find some 20 rebels in Forza Italia and the opposition Five Star Movement to give him the majority he lacks in the senate.