Silvio Berlusconi faces new scandal as Italy crisis mounts

Prime Minister Silvio Berlusconi faced new accusations on Friday over a prostitution scandal which has added a fresh distraction to Italy's efforts to avert a debt crisis that could tear apart the euro zone.

Berlusconi is reported to have told Valter Lavitola, a shadowy consultant now wanted by police, to stay out of Italy during an investigation into an alleged extortion plot against the premier in which Lavitola was suspected to be involved.

Niccolo Ghedini, Berlusconi's lawyer, said in a statement that the accusation, based on a police wiretap cited by the weekly L'Espresso, was "absurd and baseless".

The story was reported on the front pages of major Italian dailies on Friday, bringing renewed calls from the opposition for Berlusconi to resign.

This telephone call is the cherry on the cake," Enrico Letta, a senior member of the opposition Democratic Party told La Repubblica daily. "The prime minister is not leading the country, which in fact has no leader." he said, adding that Berlusconi should step aside.

Naples magistrates have issued a warrant for Lavitola's arrest but his whereabouts are unknown and he is believed to be outside Italy. Berlusconi is due to be questioned by magistrates next week as a witness in the case.

The latest accusations add to the chaos surrounding the centre-right government's efforts to handle a financial crisis that has left Italy dependent on support from the European Central Bank to keep funding its 1.9 trillion euro public debt.

Italy's European partners have watched with undisguised incredulity as different factions in the government have squabbled over the heavily revised package, which has changed shape repeatedly over recent weeks.

After repeated calls for action from the ECB, a 54 billion euro austerity plan to balance the budget by 2013 is now going through parliament, including a hike to value added tax and changes to pension rules as well as government spending cuts.

Italy, the third largest economy in the euro zone, has been teetering on the brink of a financial disaster for the past two months as markets have hammered its bonds and sent its borrowing costs soaring to unsustainable levels.

Only the ECB intervention to buy Italian bonds on the market has kept yields below levels which Rome would no longer be able to afford and which could drag the entire euro zone into a potentially fatal crisis.

Markets have so far not been entirely reassured by the measures, with the yield on Italy''s 10 year bonds standing at 5.3 per cent, still within sight of the levels just over 6 percent which prompted the ECB to intervene last month.

On Friday, President Giorgio Napolitano, who has used his authority as head of state to press the government to pass the austerity package, called for more action to boost Italy's chronically sluggish economy.

Napolitano said there was an "urgent, not to say dramatic" need for reforms to stimulate growth.

Late on Thursday, Bank of Italy governor Mario Draghi, due to take over as head of the ECB in November, met Berlusconi for talks on the latest measures, which the Frankfurt-based central bank demanded last month in return for its support.

The austerity package comes to the lower house for debate on Monday before final approval next week and the latest allegations surrounding Berlusconi have added a lurid touch to what was already a dramatic political and economic emergency.

On Tuesday, magistrates are due to question Berlusconi over the case, linked to a 2009 scandal in which a prostitute named Patrizia D'Addario claimed to have been paid to attend parties at Berlusconi''s private residence in Rome.

Naples magistrates are investigating allegations that Berlusconi paid as much as 750,000 euros to a southern Italian businessman connected to Lavitola who introduced D'Addario and other escorts to the parties.

They believe Lavitola and businessman Giampaolo Tarantini extorted the payments from Berlusconi in return for an agreement not to tell investigators that the premier was aware the women were prostitutes.

Berlusconi, who has always denied ever paying for sex, has strongly denied making any illicit payments, saying that he had only offered help to Tarantini, now under arrest, because he and his family were in financial difficulties.