Italian senate approves budget as Berlusconi era draws to close

ROME (Reuters) - Italy's Senate approved economic reforms intended to reverse a collapse of market confidence on Friday, kicking off a rapid transition that will end the Berlusconi era and clear the way for an emergency government within days.

The package of austerity measures demanded by the European Union will now go to the lower house which is expected to approve it on Saturday, triggering the resignation of Prime Minister Silvio Berlusconi.

Italian bond yields, which raced way above sustainable levels earlier this week because of political uncertainty, fell sharply on Friday in response to acceleration both of Berlusconi's resignation and the approval of the reforms.

Former European Commissioner Mario Monti, who is expected to replace the billionaire media magnate by Monday, was applauded when he took his place in the upper house for the vote after being appointed a Senator for life by President Giorgio Napolitano.

The appointment, transforming Monti from academic to legislator, was seen as clear confirmation that he will be asked to head a largely technocratic government to push through reforms in an effort to head off a perilous crisis.

With Italy, the euro zone's third largest economy, teetering close to losing control of its towering public debt, global financial markets have been panicked by the weeks of political uncertainty in Italy and the country's borrowing costs rocketed above sustainable levels on Wednesday.

Deeply alarmed by the crisis, Napolitano banged heads to overcome prolonged political infighting and get a new government in place within days.

Analysts say Monti could face an uphill battle implementing unpopular reforms with strong opposition expected from some political groups on both left and right. They said even if he was successful this would not necessarily restore investor confidence in the country.

"The markets are clutching at straws of hope in Italy. Investors are placing too much faith in the formation of a technocratic government...Technocracy should not be seen as a panacea for Italy's ills," said Nicholas Spiro, head of Spiro Sovereign Strategy in London.

Nevertheless, benchmark 10-year yields on Italian bonds fell 27 basis points to 6.7 per cent in response to the new urgency on Friday, well below Wednesday's levels when they crossed the "red line" of 7 percent.

This is the level at which Portugal and Ireland were forced to seek an international bailout.

NEW GOVERNMENT BY MONDAY?

Berlusconi, who lost his majority in a vote on Tuesday, has promised to resign after the financial stability law is passed by both houses of parliament. The delay to his resignation, and talk of a long limbo before elections unnerved the markets.

Napolitano could give a mandate to Monti as early as Saturday night or Sunday after Berlusconi resigns, so that a government can be in place before markets open on Monday.

Oliver Bailly, spokesman for the European Commission, said the Italian reforms were substantial. "It really does contain many measures which are required to reform and restore the Italian economy and to reassure the markets," he said.

But he said the commission was still waiting for the response to a letter sent to Berlusconi which asked for more details and said additional measures would be needed.

Monti, a highly respected international figure, has been favored by markets for weeks to lead Italy out of the crisis with an emergency government.

But although he would be supported by most centrists and the biggest opposition force, the Democratic Party, there is substantial opposition in Berlusconi's existing coalition.

His chief coalition partner, the Northern League, has said it would not back Monti and Berlusconi's PDL party is seriously split. Some analysts say it could implode because of the crisis, with members moving to other parties.

The party, an amalgamation of Berlusconi's original Forza Italia party and the National Alliance, an offshoot of the old far-right MSI party, is built entirely around the billionaire entrepreneur and may break up once he leaves the stage.

"I see this risk. If there's no mediation, there's a risk of a break-up," Gianfranco Rotondi, a minister without portfolio who opposes a Monti-led government, told the daily La Stampa, adding that his opinion was "widely shared" in the PDL.

(Additional reporting by Giuseppe Fonte, Catherine Hornby , Luke Baker in Brussels)

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