INSIGHT-Italy in political chaos as election nears

* Many obstacles to a Monti return

* Fate of euro zone tied to Italy's stability

* Protest movement on the rise, outrage at austerity

* Genoese comic Grillo second in polls

* Berlusconi adds new confusion

ROME, Oct 31 (Reuters) - Five months before an election that will be crucial not just for this country but the whole euro zone, Italy is mired in some of its greatest political uncertainty si n ce World War Two.

Nobody knows what electoral system will be used or who the candidates will be in a parliamentary poll that will be marked by Italian voter anger over the pain of austerity.

The once-dominant party of billionaire media tycoon Silvio Berlusconi risks disintegration while the centre-left Democratic Party (PD), likely winner of the election, is torn by splits sharpened by a challenge to its leader Pier Luigi Bersani by the youthful mayor of Florence, Matteo Renzi.

``All election campaigns are marked by uncertainty but this time ... we do not even know what electoral law will be used, who will be the party leaders and what will be the coalitions,'' PD official Lapo Pistelli said. ``This is something totally new.''

Foreign governments and investors want to see a return by respected, unelected technocrat Prime Minister Mario Monti after the poll, but the road to such an outcome is beset by big obstacles which are just as unpredictable as everything else.

Corruption scandals across Italy have fanned disgust with politicians and rocketed the anti-establishment, anti-Europe 5-Star Movement led by shaggy-haired Genoese comic Beppe Grillo into second place in opinion polls.

Around half of Italians are undecided about how to vote or say they will abstain in the poll expected on April 7-8, thickening a fog of chronic confusion.

While most concern about the euro zone currently focuses on Spain and Greece, Italy - the bloc's third largest economy - is not far behind.

Italy would race to the forefront if deeper chaos emerges from the election, as looks possible, spooking investors and pushing Rome's borrowing costs to dangerously high levels.

Many are comparing the atmosphere now to 20 years ago when the ``Clean Hands'' corruption investigation overturned the entire system and destroyed the dominant Christian Democrat party.

Berlusconi, 76, who was replaced by Monti last November when Italy tottered close to a Greece-style meltdown, added to the chaos at the weekend when he threatened to pull the plug on his successor, who depends on a broad cross-party alliance.

Although Angelino Alfano, secretary of Berlusconi's People of Liberty (PDL) party, quickly disowned this threat, the scandal-plagued magnate's outburst after a conviction for tax fraud added to the fevered atmosphere ahead of the vote.

If the results of a Sicily regional election last weekend are anything to go by, politicians are right to be worried. Grillo's candidate took most votes, although a left-centrist alliance robbed him of the governorship.

More than 50 percent of voters abstained.

``The 5-Star Movement could become the biggest party in Italy,'' said Roberto Weber, chairman of SWG polling institute as Italy reflects a trend across Europe of disillusionment with conventional political parties.

The PDL, which swept every seat in Sicily a decade ago when Berlusconi was in his heyday, won less than 13 percent, hit particularly badly by abstentions.

But 40 percent of Grillo's votes came from former centre-left supporters, SWG said, and senior PD official Pistelli told Reuters they were worried by the comic's success and by the steep decline of the PDL as the other main established party.


No single government out of the more than 60 since World War Two has lasted a full five-year term but politicians, academics and diplomats say they cannot recall a similar confluence of economic and political crisis.

Angry Italians, like other southern Europeans, are suffering badly in a deep recession worsened by Monti's debt-cutting measures.

``The economy is by far the dominant issue. After years of crisis, 2012 was even worse and households are starting to feel the pinch with more and more people out of work,'' said SWG vice president Maurizio Pessato.

``I do not believe there has ever been such a dramatic combination of institutional confusion and economic crisis for Italian families,'' said a parliamentarian close to Berlusconi who asked not to be named. ``This cocktail is really explosive.''

Monti is not standing as a candidate in the election, which would make it very difficult for him to become prime minister under the existing electoral law, and there is strong opposition to the idea both from the public and inside the centre-left PD.

A return to the unelected Monti after a fierce election campaign could fuel charges that democracy in Italy has been suspended and make parties look irrelevant. In fact the most likely scenario for him to return would be total deadlock, which itself could presage instability and a short-lived government.

In another piece of the jigsaw, President Giorgio Napolitano's term ends after the election. Napolitano has boosted the loosely defined powers of his office, including engineering Monti's replacement of Berlusconi last year.

Monti, an economist who took on U.S. corporate titans as European Competition Commissioner, may be more likely to replace Napolitano, a position in which he could sustain the prestige he has built abroad and push the government to press on with his reform agenda.

Monti, 69, is the sober antithesis of Berlusconi and his decisive presence has itself dealt a shock to the political system. In Brussels, he was known as ``The Italian Prussian'' for his hard-nosed negotiating style.

``He seemed like an extra terrestrial when he arrived (as premier),'' centre-left politician Bruno Tabacci said.

Monti has raised taxes, cut spending and carried out a radical pension reform to cut Italy's huge debt. But many of his measures have been diluted in parliament and he has had little success in boosting growth. Unemployment has hit nearly 11 percent, the highest point since monthly records began in 2004.


Even for a country that has often been a byword for instability, the situation is extraordinary.

A low turnout would make it hard for the poll's winner to establish the authority to administer further bitter economic medicine to an angry population. The PD currently leads opinion polls with about 25 percent but that could amount to only around 13 percent of the more than 40 million voters.

``In difficult times when you have to ask for sacrifices, this is a problem ... I honestly would not want to be in anybody's shoes asking for huge reforms with an electoral base that is pretty slim,'' Filippo Andreatta, a political science professor at Bologna University, told Reuters.

Even if Monti did return, a new grand coalition backing him seems unlikely after a bitter election campaign. Monti's ability to pass decisive reforms would be more limited with the losers and Grillo sniping at a political, not technocrat, government.

The centre-right PDL is racked by infighting between moderates led by Alfano and hardline, anti-Europe Berlusconi acolytes including a group of women known as the ``Amazons''.

Berlusconi, once regarded as an electoral magician, is now seen by many in his party as a liability. He faces judgment soon in a trial for having sex with an underage prostitute.

Key to what will happen is an electoral law scathingly known as ``the pigsty'' that enables party leaders to handpick members of parliament. The law guarantees a strong majority to the winning coalition, however small their vote.

``It is a law that stinks in the noses of Italians,'' prominent commentator, Sergio Romano, told Reuters. President Napolitano is pushing hard for a change in the law and politicians have vowed for months to do so.

But there are suspicions many of them, including Berlusconi, may really want to keep the law to keep the power of patronage.

If the law remains, the centre-left is expected to win with a strong majority and would see no need to restore Monti - in fact this could be seen by the electorate as cheating voters.

If the law is changed under a model being discussed with a lower winner's premium, projections show a hung parliament or a small majority led by Bersani. Monti may not be interested in leading a weak government with a short life expectancy, whose room for manoeuvre would be severely limited.

``I think it would be very difficult for Monti to be available in these circumstances ... his life would be much more difficult,'' PD member Salvatore Vassallo told Reuters.

The most likely scenario for many is that Bersani either forms a strong government after an election held under the current law or if it is changed goes for an alliance with centrists in order to govern, perhaps ceding the premiership to centrist leader Pier Ferdinando Casini's nominee.

Either way, Bersani is likely to push Monti towards the splendour of Rome's Quirinal presidential palace, which has housed popes, kings as well as presidents. ``Whatever happens, we must keep Monti close,'' said the centre-left's Tabacci.