Italian prime minister Silvio Berlusconi struggled to hold on to power and prove he can implement austerity measures pledged to European Union allies as reports of his imminent resignation sent Italian stocks surging.

Mr Berlusconi denied a report by Giuliano Ferrara, his former spokesman and now editor of newspaper Il Foglio, who wrote today that the premier would step down "within hours."

Mr Berlusconi will likely resign next week in return for support in a vote on the austerity and economic-growth measures, Mr Ferrara said in a phone interview after his initial report.

Reports of his resignation were "totally unfounded," Mr Berlusconi said in an interview with newspaper Libero today.

He said he would call on a confidence vote next week on the austerity measures and "look into the eyes of those who try to betray me." He earlier posted a message on Facebook denying rumours he planned to quit.

Italian stocks reversed early losses after Mr Ferrara's initial report on the resignation and bonds pared some of their drops.

The FTSE MIB index rose 2.4 per cent at 4pm in Milan, the biggest advance among Europe's benchmark indexes, erasing a 2.7 per cent decline. Italy's 10-year bond yielded 6.45 per cent, down from an earlier euro-era record 6.68 per cent.

Mr Berlusconi is struggling to keep his allies in line after key lawmakers announced defections before key parliamentary votes in coming days. The premier plans to stake the survival of his government in a confidence vote next week on implementation of measures pledged to the EU that aim to boost growth and trim the region's second-largest debt.

The first test comes tomorrow on a normally routine vote to rubber-stamp last year's budget report that may indicate whether Mr Berlusconi still has a majority in the 630-seat Chamber of Deputies.

A third member of Mr Berlusconi's party defected to the opposition last night, after two quit the party last week. Six others called for Mr Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera last week. More than a dozen more are ready to ditch the coalition, Repubblica daily reported yesterday, without citing anyone.

"I fear we no longer have a majority in parliament," Italian interior minister Roberto Maroni said on a talk show yesterday.

Mr Maroni, a member of the Northern League party that underpins the ruling coalition, said he backs early elections.

The desertions may deprive Mr Berlusconi of the support needed in the lower house for tomorrow's vote on the 2010 budget report.

The Chamber of Deputies failed to back the measure in an initial ballot last month, prompting Mr Berlusconi to call a confidence motion, which he won with a thin 316-vote majority.

Mr Berlusconi (75) faces mounting pressure at home and abroad to show he can jump start an economy that has expanded less than the European average for more than a decade and cut a debt that tops that of Greece, Spain, Portugal and Ireland combined.

The country faces an average of almost €20 billion of bond maturities a month next year at a time when it must pay 470 basis points more than Germany to borrow for 10 years. The yield on the benchmark bond is now close to the 7 per cent level that drove Greece, Ireland and Portugal to seek bailouts.

In a bid to boost confidence, Mr Berlusconi asked the International Monetary Fund last week to monitor Italy's debt-cutting efforts.

In Italy, governments routinely call confidence votes to bring rebellious MPs into line and speed the passage of legislation. Mr Berlusconi has used the mechanism more than 50 times since his election in 2008.

With the ranks of Mr Berlusconi's majority thinning, opposition leaders are also trying to muster backing for a no- confidence vote to try to topple the leader, who has governed for more than half of the 17 years since he entered politics in 1994.

Mr Berlusconi has faced only one such vote, which he survived, in December of last year. Should he fail to muster a majority in either type of confidence vote, the government would fall and president Giorgio Napolitano would then consult with political parties to see whether another majority could be formed.

Mr Napolitano could also try to build support for a so-called technical government led by a prominent figure charged with implementing the economic reforms and eventually preparing the country for new elections.

If Mr Napolitano cannot forge a new government, elections would be called and likely held two months after the consultations end.

Should Mr Berlusconi win the confidence vote next week, he would likely resign and push Mr Napolitano to agree to elections in January, rather than negotiating a new government, said Mr Ferrara, who ruled a technical administration.

Il Foglio's biggest shareholder is Paolo Berlusconi, the premier's brother.

Mr Berlusconi's popularity is at a record low and his coalition trailed the main opposition alliance by 10 percentage points in a November 1st poll

Mr Napolitano (82) who consulted last week with all political parties about the crisis, called for unity at the weekend. Italy can't mend itself "in a climate of war" and it's "indispensible" that all parties back the austerity and growth measures promised to the European Union, Mr Napolitano said.

Mr Berlusconi's government in August approved €45.5 billion in austerity moves, its second deficit-cutting plan in a month, to secure European Central Bank purchases of Italian debt after yields surged above 6 per cent.

Italy, which is due to auction treasury bills this week, sells more than €200 billion of bonds a year.

Mr Berlusconi yesterday said he plans to govern until his term ends in 2013 and reiterated that Italy must swiftly approve its economic overhaul.

Bloomberg