UPDATE 1-Berlusconi conviction leaves Italian government hanging
* Berlusconi says victim of persecution by magistrates
* President Napolitano, Prime Minister Letta appeal for calm
* Country once more caught in uncertainty
(Updates with analyst comment, initial market reaction)
ROME, Aug 2 (Reuters) - A supreme court ruling upholding a tax fraud conviction against former centre-right leader Silvio Berlusconi has left the fate of Italy's fragile ruling coalition in the balance, although his supporters said the government would not be brought down.
Just three months after centre-left Prime Minister Enrico Letta took office at the head of an uneasy coalition with Berlusconi's People of Freedom party (PDL), Italy, the euro zone's third largest economy, is again mired in uncertainty.
The 76-year-old billionaire reacted angrily to the decision by the supreme court to reject a final appeal against his conviction, protesting his innocence and accusing magistrates of persecuting him since his entry into politics 20 years ago.
The ruling, confirming a sentence for tax fraud involving inflated invoices at his Mediaset broadcasting empire, was the first definitive sentence he had received after dozens of previous trials on charges ranging from tax to sex offences.
"No one can understand the real violence which has been directed against me," he said in a video message broadcast on Italian television after the verdict. "A genuine campaign of aggression that has no equal," he said.
Berlusconi is unlikely to have to serve any time in jail because of his age. The supreme court ordered part of the original sentence - imposing a ban on holding political office - to be reviewed. But the ruling has dealt an unprecedented blow to the man who has dominated Italian politics for two decades.
"His conviction is like the fall of the Berlin Wall in 1989," crowed Beppe Grillo, leader of the anti-establishment 5-Star Movement and a ferocious critic of Berlusconi.
For all the drama, financial markets largely shrugged off the news, suggesting that investors expect the government to muddle through for now.
Italy's blue-chip share index opened flat on Friday, yields on its 10 year bonds eased and the spread with German Bunds - the main measure of the premium Italy pays for its debt - narrowed. Shares in Berlusconi's Mediaset fell as much as 4 percent in volatile early trade.
Berlusconi said he would continue his political activities under the "Forza Italia" (Go Italy!) name of his first party and press for a reform of the justice system, but he made no direct reference to the future of the coalition with Letta.
Senior allies also reacted with bitterness, but also said the ruling would not bring down the coalition between Letta's centre-left Democratic Party and Berlusconi's People of Freedom.
"This sentence will not affect the Letta government, which was created to serve the country and which will continue to serve it as far as we are concerned," former Justice Minister Nitto Palma said after a meeting in Berlusconi's Rome residence.
A greater threat to the government could come from Letta's own faction-ridden centre-left Democratic Party (PD), many of whose members are already unhappy with ruling in coalition with Berlusconi's party and could now rebel.
As millions of Italians head off for their sacrosanct August summer holidays and parliament prepares to go into recess, there was little expectation of an immediate government crisis that could trigger snap elections.
But what might come over the next few months remains completely uncertain, with Letta struggling to contain increasing unhappiness in his PD.
"It is inevitable political tension will intensify, though we are in the middle of the summer lull. In September this could reignite concerns on the government's survival and the repercussions for the economy," said Claudio Aspesi, an analyst at research firm Bernstein.
Berenberg economists the ruling would not to bring down the government, at least not in the next few months. "The key this autumn will be whether the centre-left....will decide to continue the coalition or go for new elections," they said in a note.
"It knows that new elections can be risky, spook markets and delay recovery."
President Giorgio Napolitano, the man who would have to decide whether to call new elections if the ruling coalition fell apart, urged calm and said the country needed "serenity and cohesion." His comments were echoed by Letta.
But the ruling added another obstacle to Letta as he struggles to lead Italy out of its longest postwar recession, reform its stagnant economy and cut its mountainous public debt. More challenges may lie ahead.
As well as the tax fraud case, Berlusconi is also fighting a separate conviction for paying for sex with a minor, in the notorious "bunga bunga" prostitution case that tarnished his final months in office in 2011.
With the European Central Bank promising support if needed, investors have so far shown little concern, with the main barometer of market sentiment, the spread between Italian 10- year bonds and their safer German equivalents at 270 points on Thursday, well below levels in previous crises.
That could change if prolonged political instability fuelled doubts about Italy's badly strained public finances and created the kind of pressure that brought down Berlusconi's last government as the euro zone crisis peaked two years ago.
(Additional reporting Danilo Masoni, Francesca Landini and Francesco Canepa; Writing by James Mackenzie and Silvia Aloisi; Editing by Peter Graff)