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Berlusconi won't give in: What it means for Italy

Pier Marco Tacca | Getty Images News | Getty Images

Although Italy's Silvio Berlusconi is still safe in public office while a review of what would effectively be political exile takes place, his conviction for tax fraud is an "extremely destabilizing development" with significant implications for Italy's fragile coalition government, analysts said.

"An already conflict-ridden Italian political scene has just become even more divisive following [the]ruling…The strains on prime minister Enrico Letta's fragile coalition government are growing with each passing day," Nicholas Spiro, head of Spiro Sovereign Strategy, told CNBC.

"For Berlusconi's People of Freedom party (PdL), the ruling is a potential deal-breaker which, even if it doesn't lead to the fall of the government, makes any cooperation with Mr Letta's Democratic party (PD) all but impossible," he added.

On Thursday, Italy's highest court upheld a jail sentence against Berlusconi for tax fraud involving his Mediaset company. The sentence was commuted from four years to one year under an amnesty, but the judges ordered a judicial review of a five- year ban from public office that Berlusconi was handed.

This will enable him to remain as a senator and as leader of his center-right People of Freedom Party (PDL) for the time being. For his part, Berlusconi remained defiant on Friday, saying on one of his TV channels that he had been "persecuted."

(Read more: Mediaset exec: Berlusconi didn't help run company)

He denied committing tax fraud yet again and said he would revamp his party, returning it its previous the "Forza Italia" name. Il Giornale newspaper, owned by Berlusconi's brother, ran the headline "Il Cavaliere non molla": The Knight (as Berlusconi is known) is not giving in.

Meanwhile, Prime Minister Letta and President Giorgio Napolitano pleaded for calm after the ruling. Its effect was already starting to have an impact on the coalition. Members of Berlusconi's party threatened resignation and solidarity with their leader while opposition leaders said the coalition could not continue.

The political repercussions for Letta's party were potentially greater than for Berlusconi, Nicholas Spiro said. "Already internally divided and facing a leadership struggle, the PD must now decide whether Mr Letta's government is more important than its visceral dislike of Mr Berlusconi and the PdL."

Giovanni Orsina, professor of Italian history at the Luiss-Guido Carli University in Rome and author of a book called "Berlusconism," said Italy's government was now facing three possible scenarios.

"A) That Berlusconi votes the government down and tries to have new elections. B) Berlusconi says that the government must not suffer from his personal problems but the PD decides that they cannot go on in a coalition with a party led by a man convicted for tax fraud and we have new elections or C) The government goes on, even though it is much weaker."

(Read more: Is the net closing in on 'Houdini' Berlusconi?)

Orsina thought the third scenario of a coalition limping on as the most likely and Chris Scicluna, head of research at Daiwa Capital Markets agreed. "While Berlusconi has come out fighting, and there are no doubt associated risks to the longevity of the current coalition government and its ability to press ahead with economic reform, our expectation remains that, for the time being, this government is here to stay," he said in a note on Friday.

As for Berlusconi, Orsina believed that the man known in Italian press as "Il Cavaliere" (the Knight) would not surrender as long as his party, which leads polls despite Berlusconi's peccadillos, remained popular. "He will not let go, and at the moment he controls his party and his voters haven't found anywhere else to go – yet."

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld

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