Italian PM puts stricken government to decisive test

ROME, Jan 22 (Reuters) - Italian Prime Minister Romano Prodi put his centre-left government on the line on Tuesday when he called a confidence vote after the defection of an ally robbed him of a majority.

A former minister dealt the government a potentially fatal blow on Monday by withdrawing his party's support, leaving Prodi outnumbered in the Senate (upper house). The opposition called for Prodi to resign.

Economy Minister Tommaso Padoa-Schioppa warned the political ccrisis had come at "the least appropriate moment to interrupt the work underway" on improving Italy's public finances.

Prodi had little alternative but to quit or submit his leadership to a confidence vote -- for the 32nd time since he came to power in 2006 after beating conservative prime minister Silvio Berlusconi in the closest elections in Italy's history.

"Only parliament can decide the fate of the government," he told the lower house where his comfortable majority should mean victory in the confidence vote -- a tool he has mostly used to push through legislation -- at 1600 GMT on Wednesday.

He also faces a vote on Thursday at 1900 GMT in the Senate, where even before the defection of former justice minister Clemente Mastella he had survived only with the support of unelected lifetime senators.

Prodi defended his government's record on economic growth and spending controls, as well as giving Italy a higher profile in the European Union and on the world diplomatic stage.

"We need continuity of action above all at a moment when the world economy is faced with negative developments," Prodi said.

Losing would force Prodi to resign. Unlike last February, when Prodi called wavering allies' bluff by quitting and getting reinstated by President Giorgio Napolitano, this could be final.

A former European Commission president, Prodi's previous stint as premier was cut short in 1998 and he has ruled out running for prime minister for a third time.

BERLUSCONI SCENTS BLOOD

"I still expect him to try to wriggle out of it, but I hope that won't happen and that we can go straight to elections," said media magnate Berlusconi.

His centre-right opposition, ahead in most polls, suffered divisions last year but former foreign minister Gianfranco Fini said his right-wing National Alliance would back Berlusconi for prime minister if elections were called.

One Prodi ally, Environment Minister Alfonso Pecoraro Scanio -- facing a confidence vote over the rubbish crisis in Naples -- said it would be "masochism to hand Italy back to Berlusconi".

If Prodi falls, Napolitano could call snap elections or appoint an interim government. Its task would be to oversee a reform of messy voting rules blamed for an unstable system of coalition governments that are held to ransom by small allies.

Mastella's Udeur and the communists on the opposite wing have given Prodi a rough ride ever since he came to power.

Supporters of a referendum on electoral reform want Italy to move closer towards a two-party system while small parties fear this would banish them from parliament. Berlusconi, sensing a chance to return to power, favours holding snap elections.

"We should have elections straight away. I don't think a technical government is the solution," said Berlusconi.

But economist Tito Boeri said elections under the existing rules "would be a disaster for the economy as they allowed for all these one-man parties and political fragmentation".

The professor at Milan's Bocconi University said political upheaval meant "there's not much strategic thinking now about how to make Italy's economy start facing structural impediments and avoid being involved in a recession".