Letta returned from New York to convene a Cabinet meeting to work out how to delay or avoid a controversial planned rise in sales tax, and to secure approval for additional budget measures to bring Italy's deficit within EU limits.

Instead, he was forced to determine if lawmakers from Berlusconi's center-right People of Freedom party (PDL) still support the 5-month-old government, after threats of rebellion from the media mogul's allies following the former prime minister's tax fraud conviction. Letta's center-left Democratic Party (PD) governs with the People of Freedom party in an uneasy alliance.

Letta, who told the Cabinet that no further legislation would be enacted until the crisis was resolved, is expected to ask parliament for a confidence vote in the next few days.

Berlusconi's loyalists have threatened to quit if a Senate committee votes to strip him of his seat because of the conviction, which was upheld by Italy's top court in August.

"Efficient government action is obviously incompatible with the mass resignation of a parliamentary group which should support the government," Letta said in a statement.

"Either there is a new start and the interests of the country and its citizens are put first or this experience is at an end," he said, referring to the tense coalition.

Letta said there was an "impossibility of committing to measures worth billions of euros without a guarantee on the government's continuity."

The PDL had been pushing to delay the planned rise in sales tax, from 21 to 22 percent, but in doing so Italy would need to find around 3 billion euros ($4.05 billion) to make up the difference and bring the country's deficit inside the EU ceiling.

The International Monetary Fund (IMF) warned on Friday in a new report on Italy's economy that coalition tensions posed a "key risk."

"The coalition government that took office in April is moving forward on the reform agenda, but faces political constraints. While the government maintains support in the parliament, tensions between the coalition partners are apparent and represent a key risk."

Italians voted in February in parliamentary elections, but inconclusive results led to a two-month standoff, forcing the rival PD and PDL into the coalition. The dispute over the sales tax is the latest in a string of bitter differences.

jr/hc (Reuters, AP, AFP)