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Berlusconi stands alone after party split

Franco Origlia | Getty Images News | Getty Images

The political party led by Silvio Berlusconi suffered a split this weekend which could further weaken Berlusconi's position but also that of the coalition government, in which his party is a key partner.

Five key members of his People of Freedom (PdL) party split from the party this weekend to support for Prime Minister Enrico Letta – the leader of the center-left "Democratic Party" (PD) who leads the coalition government.

The conflict between pro-government moderates and Berlusconi loyalists came to a head at the national convention of the PdL on Saturday, where the party decided to revamp itself under its old name of "Forza Italia" and declared its opposition to the government.

(Read more: Berlusconi 'party showdown' seen as doves and hawks collide)

The announcement prompted the five most prominent party members within the PdL who are all government ministers -- led in their defection by Deputy Prime Minister Angelino Alfano -- to announce they were leaving the party. They will create their own "New Center-Right group" (NCD) which will support the government and make it more stable.

Berlusconi did not say whether his "Forza Italia" group would join the opposition after the split. Tensions have been rising within the party ranks over support for the coalition government.

In October, Berlusconi had clearly signaled his discontent by calling a vote of confidence which Letta won with the support of PdL moderates under Alfano, who was duly dubbed a "traitor" by Berlusconi.

Despite the split seemingly enhancing support for the Italian government, market analyst Wolfango Piccoli, managing director of Teneo Intelligence, said the split heralded more uncertainty for Italy as a whole.

"These developments imply that Letta's government will be able to count on the support of around 168-169 senators in total even if Forza Italia decides to join the opposition," Piccoli said in a note on Sunday. "[But] the positive implications for Letta of the PDL split should not be overstated."

"It is true that the prime minister will continue to enjoy an upper house majority for the foreseeable future [but] assuming that Berlusconi does withdraw support for the government, Letta will become dependent on an untested alliance, and the size of the opposition in parliament will increase substantially."

"This will further reduce the government's already-limited ability to push ahead with meaningful reforms," he said.

Catch 22

While the government's political "coherence" could be improved with a departure of Forza Italia, which has prevented and delayed numerous reforms, the popularity of Letta and his party could be threatened if it becomes the unpopular bearer of those reforms.

Yet if Forza Italia remained in the governing majority, Piccoli warned, "Letta will still be somewhat constrained by Berlusconi's demands. This will complicate the passage of the 2014 budget [to be voted on November 22], which could prove to be the next friction point for the ailing coalition government."

Berlusconi has not yet shown his cards following the split, and could keep his hand until the Senate votes on November 27. It will then decide whether to expel Berlusconi from political life following a conviction for tax fraud that he received in August.

(Read more: Will Rome listen to Italy's downgrade 'wake-up call')

For his part, Berlusconi has said it would be unthinkable for his party to continue to cooperate with the government if it commits what he called "political homicide" by voting him out later this month.

"All in all, the negative noise is likely to increase over the next few weeks given the tense situation and the busy parliamentary agenda," Piccoli said.

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

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