Italy crisis increases as president pulls out of meeting

Italian President Giorgio Napolitano
Alberto Pizzoli | AFP | Getty Images

Italy's president Giorgio Napolitano cancelled his attendance at a political conference on Thursday, because of a "disturbing" political development that required his attention, according to various media reports in Italy and the U.K.

Reacting to the growing political confusion over the state of the country's fragile coalition government, Italy's FTSE MiB index was trading down 1.8 percent and the yield on Italy's benchmark 10-year bond rose more than 80 basis points to 4.46 percent.

"I would have participated in today's conference if yesterday there had not been a sudden political development that is institutionally disturbing and which requires all my attention today," Napolitano wrote in a note to the conference organizers, Reuters reported on Thursday.

On Wednesday evening, members of Silvio Berlusconi's center-right party renewed threats to resign if their leader was expelled from parliament due to a conviction for tax fraud when the Italian Senate votes on the matter on October 4.

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

Napolitano's cancellation follow Italian prime minister Enrico Letta telling CNBC that "stability" was his priority for the government.

He said he was working hard to bring the country back on the path of economic growth and stability while tackling tensions in his fragile coalition government over delayed tax increases and reforms.

Italian Prime Minister: No decision on VAT increase

"[My priority is] stability, stability, stability," he told CNBC's Maria Bartiromo in New York on Wednesday. "I'm working for stability to have low interest rates, continued fiscal consolidation and maintaining the deficit under control – as it is – and for pushing growth."

Part of his immediate growth plan included incentives to encourage companies to hire more young people and a recovery in the housing market, he added.

"Italy is a trustable country with a budget under control, now we have to work on growth and I'm confident that at a European level, after German elections growth will be the focus."

Italy is the euro zone's third-largest economy and, although its budget deficit is within European Union limits of 3 percent, political instability has threatened to disrupt not only the country's government but its economy too.

(Read more: Italy seeks to reassure as crisis looms)

The government is also working to reform the country's labor market to encourage companies to start hiring: the unemployment rate in Italy is 12 percent, 39 percent for those aged under 25.

Though Letta believed Italy's economy would grow by 1 percent in 2014, the country's debt and deficit figures are still a cause for concern. Debt as a proportion of its gross domestic product is the second-highest in the 17-country euro zone: 130 percent against an euro zone average of 92 percent, according to EU data service Eurostat. Just last Friday, the government raised debt and deficit forecasts for 2014.

Political instability has been the dominant characteristic of Italian politics since inconclusive elections in February. After two months of political impasse, Enrico Letta's center-left Democratic Party formed a coalition with Silvio Berlusconi's center-right "People of Liberty" party – an alliance that has been fraught with infighting.

(Read more: Berlusconi video ultimatums could steal government's spotlight)

The coalition has reversed economic reforms and tax increases introduced by the previous technocrat government under Mario Monti, and delayed others that it needs to implement to control government spending.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us @CNBCWorld