Italian Economy Minister Giulio Tremonti has walked out of the government after a showdown with coalition allies, crippling Prime Minister Silvio Berlusconi's administration at a time when Italian accounts face EU scrutiny.

But yesterday, more than 12 hours after a stormy confrontation with coalition leaders, Tremonti had not yet handed in his resignation and is awaiting an official request from Berlusconi for him to step down, a government source said.

"From a formal viewpoint, this issue is blocking the situation," the source told Reuters, adding that Berlusconi was poised to take over the economy portfolio on an interim basis.

The immediate problem facing the prime minister is a meeting in Brussels tomorrow at which European Union finance ministers are due to decide whether to give Italy an early warning about its growing budget deficit.

Tremonti, 56, fell out with his cabinet colleagues after a fierce argument with Deputy Prime Minister Gianfranco Fini, who has repeatedly accused the Treasury of failing to consult coalition partners on key decisions.

Sources said Fini told Berlusconi on Friday that he would pull his National Alliance (AN) party out of the government unless Tremonti stood down and accused the economy minister of concealing the truth about Italy's budget problems.

An AN official said the party was sure Tremonti would soon formalise his resignation and said his departure would boost the coalition after recent setbacks in local and European elections. "The government can now get back to business, which is what the country needs and what we need to win the 2006 general elections," said AN's national co-ordinator, Ignazio La Russa.

Tremonti was a pivotal figure in the government and his abrupt departure is a major blow for Berlusconi, who had great faith in the ability of his sharp-tongued minister to dig Italy out of its deficit and debt woes.

While Tremonti always succeeded in keeping Italy's budget on track, thanks largely to a raft of stopgap measures, he failed to find a magic formula to revive the sluggish economy which has persistently underperformed over the past decade.

His exit will do nothing to ease worries in Brussels about the Italian budget deficit, which the European Commission says will breach the bloc's ceiling of three per cent of gross domestic product (GDP) this year without swift government intervention.

Sources in Rome said Berlusconi was trying to delay tomorrow's finance ministers' meeting, but a spokesman for the EU presidency said it would go ahead as scheduled.

Italian newspapers sounded the alarm over Tremonti's dramatic walkout, saying it could not have come at a worse time.

"We are faced by an extremely serious political crisis," Il Sole 24 Ore wrote in a terse frontpage editorial. "There is no doubt that this represents a negative blow to Italy's credibility on the international markets."

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