By Gavin Jones

ROME (Reuters) - A hostile domestic reaction to Italy's 2014 budget may pose a new threat to the stability of Enrico Letta's government just weeks after the prime minister defeated Silvio Berlusconi's attempt to topple him.

The budget, unveiled on Tuesday, has been attacked by employers, unions and most of Italy's media, and also by senior politicians in Letta's left-right ruling coalition who have virtually disowned the package.

The biggest worry for Letta will be the hostility from within the ruling parties, which raises the risks that the budget will be completely overhauled during its passage through parliament and that a new political crisis may not be far away.

"Half the PDL is trying to bring down the government again," was the headline on Thursday in the Letta-supporting l'Unita newspaper - a reference to former premier Berlusconi's People of Freedom party, or PDL.

The budget, which must be approved by parliament by the end of the year, is likely to become the focal point and a pretext for a myriad of protests against the unpopular government, which uncomfortably combines Letta's center-left Democratic Party (PD) and its traditional rival.

Foremost among these threats are the legal problems of Berlusconi, whose grip over the center-right has been loosened but certainly not broken by his failed attempt to oust Letta in early October.

That incident opened deep divisions within his party, and it was no coincidence that some of the loudest criticism of the budget came from so-called "hawks" who remain most loyal to Berlusconi and still want to bring down Letta.

"This budget is not what the country needs," said PDL lower house leader Renato Brunetta, who vowed to ensure that parts of it, such as a tax on high-level pensions, are eliminated by his party in parliament.


Berlusconi faces a crucial vote on the floor of the Senate next month on whether to expel him from parliament after his tax-fraud conviction, and many commentators believe he will use the budget to justify a new bid to bring down the government.

Yet with party discipline shattered on both sides of the political divide, some senior members of Letta's PD have been as critical of the budget as the PDL.

Deputy Economy Minister Stefano Fassina wrote in a blog on Wednesday that the strategy to cut public spending and reduce labour costs was mistaken, taking aim at both Letta and his own boss, Economy Minister Fabrizio Saccomanni.

The PD's leader, Guglielmo Epifani, said the budget had some positive aspects but "needs to be improved in parliament".

Letta and Saccomanni, aware of the delicate political situation, have stressed they will welcome budget amendments, in contrast to the usual approach where the government tries to ringfence its legislation as much as possible.

But the political tensions and the government's weakness could mean budget amendments for larger and unfunded tax cuts, posing a threat to the goal of keeping the fiscal gap below the European Union's ceiling of 3 percent of output.

Letta had built up expectations the budget would reverse years of austerity with a major cut in what he called the "unbearable" level of labour taxes. Reducing them to boost pay packets would be "the heart of the budget", he promised.

Yet he underestimated the difficulties in funding the cuts with offsetting reductions in spending. As a result the budget made only minor tax adjustments, drawing the common charge that Letta lacked courage and was more interested in his political survival than boosting the economy.

"The results are far below what was promised, but above all they are far below the needs of the country," said Susanna Camusso, leader of Italy's largest trade union, the CGIL, which is threatening strikes alongside other more moderate unions.

(Editing by Catherine Evans)