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Silvio Berlusconi, left, and Enrico Letta.

Italian felon and former prime minister Silvio Berlusconi triggered a fresh political crisis that could rattle the European economy by threatening to bring down the government for the second time in less than a year.

Mr. Berlusconi, who turned 77 on Sunday and who was convicted of tax fraud in August, called for new elections "as soon as possible," throwing the grand coalition government of Prime Minister Enrico Letta into chaos only five months after it was cobbled together. Mr. Belusconi's threat came shortly after he ordered five ministers to resign from Mr. Letta's government.

"All the opinion polls show that we will win," he declared, insisting he was energetic enough to fight another election.

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Only hours later, Mr. Berlusconi appeared to soften his stance somewhat, suggesting he would back the new budget, due to be unveiled in October, if the austerity taxes designed to prevent the Italian budget deficit from swelling are not boosted. He said he was pulling his party out of the cabinet because he opposed the government's decision to go ahead with a one percentage point increase in the value-added tax, or VAT.

But Mr. Letta called Mr. Berlusconi's explanation an "enormous lie" and that Mr. Berlusconi was purely driven by parliament's drive to expel him from the senate because of his tax conviction. The centre-left Democratic Party, led by Mr. Letta, has argued that Italy's new anti-corruption law requires Mr. Berlusconi's removal, which may come as early as October.

Mr. Letta said he would ask parliament for a vote of confidence in his coalition on Wednesday. "I will ask for the confidence of both the Senate and the Chamber of Deputies. … If I do not get it, I will draw my conclusions," he said in a television interview on Sunday.

If Mr. Berlusconi triggers an election, it will be the second government he has brought down since he was effectively ousted as prime minister in the autumn of 2011, at the height of the European debt crisis.

He was replaced by Mario Monti and his technocrat government, which lasted only until December, 2012, when Mr. Berlusconi's centre-right Popolo della Liberta (People of Liberty) party withdrew its support. The February election resulted in a hung parliament. Three months later, Mr. Letta and Mr. Berlusconi formed an uneasy coalition whose longevity was always in doubt.

On Sunday night, Mr. Letta was holding crisis talks with Italian President Giorgio Napolitano, who is trying to find a way to keep the government intact, or replace it with a new one, so the crucial new budget can be drafted.

If the government does fall, Italy's debt crisis is bound to come roaring back. Last week, as it became apparent that Mr. Letta's government might not survive, Italian sovereign bond yields – the cost of borrowing – rose. They are expected to rise again Monday, potentially sharply. "Needless to say, the ongoing political scenario is now expected to weigh on Italian BTPs," Newedge Group analyst Annalisa Piazza said in a Sunday note, using the acronym for Italian bonds.

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The government's labour minister, Enrico Giovannini, predicted an Italian bond bloodbath. "Measures we were working on now risk being set back," he said on Italian TV. "On Monday, our borrowing costs are going to rise by many points."

The European Union and the International Monetary Fund, which together have bailed out Greece, Ireland, Portugal and Cyprus, fear a renewed Italian debt crisis could threaten Europe's nascent economic recovery. Italy, the euro zone's third biggest economy, its biggest debtor and the world's fifth biggest manufacturer, is big enough to do a lot of damage if its economy and bond markets falter. A recent IMF report said that "given its central role in the global trading and financial system, a significant idiosyncratic shock in Italy could generate regional or global spillovers."

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