UPDATE 1-Italy says to press ahead with divisive tax decisions
* Govt says will overhaul property tax (IMU) by end-August
* Berlusconi says govt survival depends on scrapping IMU
* Cancelling both IMU and IVA would cost 8 bln euros annually
ROME, July 22 (Reuters) - Italy's fragile coalition government said on Monday it would press on with plans to reform a hated housing levy and resolve differences over sales tax, despite earlier reports it might have to postpone decisions on the divisive issues.
Disagreements over tax policy have tested the left-right coalition, which has seen its public support tick down steadily since it was formed in April.
Prime Minister Enrico Letta has had to juggle demands for tax cuts from his centre-right partners with European Union-mandated limits on an already strained budget.
The coalition's economic working group met on Monday and said it had decided to stick to its timetable to reform the levy by August.
"The meeting has allowed us to identify a working method that ensure that shared policy decisions will be made in the coming months," it added, without going into further detail.
In May, the June payment of the levy on first homes was pushed back until the end of the year, and a scheduled value-added tax increase was delayed until October from July.
Several official sources had said the government may delay the decisions and try to find a permanent solution in the 2014 budget.
Earlier on Monday, a government source said the government would likely postpone any agreement until after August in the face of intractable political disagreement.
RIVALS TURNED PARTNERS
Letta's centre-left Democratic Party (PD) and four-time Prime Minister Silvio Berlusconi's centre-right People of Freedom (PDL) were bitter rivals until backing a grand coalition in a desperate bid to break a political deadlock following an inconclusive election in February.
The government's challenge is to stimulate growth in the euro zone's third-biggest economy to combat its longest postwar recession, without pushing up deficit spending.
Italy's huge debt far exceeds annual output and it is being closely watched by the European Union to ensure it does not break budget limits.
In addition, some economists doubt whether scrapping the housing levy and freezing IVA will in fact boost growth.
"I wouldn't expect any significant benefit on growth or consumer sentiment," said Marco Valli, chief euro zone economist at UniCredit in Milan.
The PDL, which made abolishing the property tax its central electoral plank, says the government's survival hinges on removing it completely. The PD, on the other hand, has called for it to be scrapped only for medium to low-earners.
The annual cost of eliminating IMU and keeping steady the IVA rate, now at 21 percent, is estimated at about 8 billion euros ($10.51 billion), and Economy Minister Fabrizio Saccomanni has said he does not know how to cover such a big revenue shortfall.
Both tax increases were put in place by Letta's technocrat predecessor, Mario Monti, who imposed tough austerity to pull Italy back from the brink of default when the euro zone debt crisis was white hot at the end of 2011.
The opposition has fiercely criticised Letta's government for doing little except keeping power in the hands of the country's traditional parties, and the government's delaying tactics have been targeted by satirists.
Earlier this month, a vignette on the front page of Italy's most influential newspaper, Corriere della Sera, depicted the bespectacled prime minister proudly calling himself "Enrico Slitta" or "Enrico Postpones", a play on the premier's name.
Last week, Saccomanni sent out mixed signals about possible share sales in state-owned companies like oil group Eni and aerospace group Finmeccanica, suggesting further indecision in the coalition.
But by Italian law, funds from stake sales can be used exclusively for debt reduction and not for current spending.