By Paolo Biondi
ROME (Reuters) - Italian President Giorgio Napolitano cancelled his attendance at a conference on Thursday because of what he called disturbing political developments after centre-right supporters of Silvio Berlusconi threatened to walk out of parliament.
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.
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.
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 public debt, and bring its budget deficit under control.
As the latest bout of political brinkmanship preoccupied Rome, rumours 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.
Napolitano, who had been due to attend a conference on post-war premier Alcide De Gaspari, sent a message to organisers excusing himself and saying that "a sudden political development that is institutionally disturbing" required his attention.
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.
On Thursday, Transport Minister Maurizio Lupi, a member of Berlusconi's Forza Italia (FI) party, said the centre-right had no joint commitment to stand down. "The resignation of the parliamentarians is a decision which will depend on the conscience of each individual," he told RAI state radio.
"IF THIS MESS CONTINUES, I COULD RESIGN"
But Letta's centre-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
"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.
PD leader Guglielmo Epifani accused the centre-right of "blackmail" but said his party would not change its approach and would vote to strip Berlusconi of his seat.
Berlusconi's political fate has hung in the balance since the tax fraud conviction opened the way to his expulsion from parliament under legislation passed last year that bans politicians with criminal convictions from holding seats.
He says the sentence, which is likely to remove his parliamentary immunity from arrest over other cases, is unjust and accuses what he calls left-wing magistrates of plotting to drive him out of politics.
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."
Napolitano, who would have to decide whether to call new elections or seek to build a new coalition if the centre-right bows out of the government, has said he does not want a vote.
But the constant tension within the coalition has hobbled reform efforts and wasted weeks in wrangling over issues including tax cuts and Berlusconi's political future.
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.
(Editing by Mark Heinrich)