UPDATE 1-Economy minister sees subdued market reaction to Italian govt chaos
ROME, Sept 29 (Reuters) - Italy's economy minister played down the risk that financial markets will punish Italy when they open on Monday, after Silvio Berlusconi pulled his ministers out of the cabinet and provoked a crisis that has increased the risk of early elections.
The centre-right leader's dramatic move on Saturday effectively brought down the government of Prime Minister Enrico Letta.
"I think the uncertainty connected to the government's instability has been to a large extent already factored in during the last few weeks," Economy Minister Fabrizio Saccomanni told business daily Il Sole 24 Ore.
Letta meets President Giorgio Napolitano on Sunday to discuss the next step and will address parliament early next week. Napolitano has made clear he is against the idea of new elections just seven months after the last vote, but it is not clear if a new parliamentary majority can be found.
Even before Berlusconi's shock move coalition infighting had thwarted efforts to push through important reforms Italy needs to emerge from a two-year recession, a decade-long economic stagnation, a 2-trillion-euro public debt and youth unemployment of around 40 percent.
The resignations will delay those reforms even further.
Friction between the two sides had been rising for weeks following moves to expel Berlusconi from parliament after his conviction for tax fraud last month.
The political tensions have increasingly worried investors, with Italy's borrowing costs hitting a three-month high at an auction of 10-year bonds on Friday.
Saccomanni said markets knew Italy had already got its public finances into line and the economy was improving.
"I hope that on Monday this trust (by the markets) will be confirmed," he said.
A cabinet meeting on Friday had been intended to find funding to avert an increase in sales tax from 21 percent to 22 percent. That increase, which has been fiercely opposed by Berlusconi's party, will now kick in from Tuesday.
The level of hostility between within the coalition has reached a point that makes any kind of reconciliation appear unlikely.
Berlusconi said he was withdrawing his ministers because of the government's failure to suspend the sales tax hike, but Letta dismissed this as a "huge lie," by the media tycoon, used to justify his "mad and irresponsible action.".
Other ministers did not share Saccomanni's sanguine view of the market's likely reaction.
"On Monday our borrowing costs are going to rise by many points," Labour Minister Enrico Giovannini said on Saturday, while Deputy Economy Minister Stefano Fassina warned on Sunday that borrowing costs would shoot up if new elections were called.