* Letta says crisis would have "dramatic costs"
* Business leaders warn against new elections
* Key Senate committee on Berlusconi meets on Monday
Italian Prime Minister Enrico Letta warned of the risk of fresh political turmoil on Sunday, a day before a Senate committee meets to decide whether to expel the country's former leader Silvio Berlusconi from parliament.
As the two main partners in his fragile coalition prepare for a showdown over Berlusconi's future, Letta told business leaders that economic recovery had been hampered for too long by Italy's "permanent political chaos".
"Instability has a cost, it would mean that interest rates rise again and we'll all have to pay more," he said at a conference in the lakeside town of Cernobbio outside Milan. "Instability has drastic costs, whereas stability pays."
Letta, named as head of an unwieldy coalition between his own centre-left Democratic Party (PD) and Berlusconi's People of Freedom (PDL) after last February's deadlocked elections, said his 130 days in office had not been easy.
"But I reject the caricature which says we have done nothing," he said, pledging to "break the chains" which have blocked reform of an economy which has been stagnant for more than a decade and deterred foreign investors.
Letta's comments come a day before a Senate committee meets to begin deliberations which could lead to Berlusconi, who has dominated Italian politics as a politician and media magnate for decades, being expelled from parliament following his conviction for tax fraud last month.
The cross-party panel has become the focal point of a battle over the political future of the 76 year-old billionaire, who was sentenced to a four year prison term which is likely to be commuted to one year under house arrest.
The PDL has warned it will pull out of the coalition and bring down the government if centre-left members vote to start proceedings for expulsion although Berlusconi faces at least a year in political exile in any case once his sentence begins.
With memories of the euro zone debt crisis of two years ago still fresh and Italy struggling to emerge from recession, Economy Minister Fabrizio Saccomanni warned on Saturday that a coalition breakdown would risk fresh bond market tensions.
"I hope the government doesn't fall," said Marco Tronchetti Provera, chairman of tyre maker Pirelli, echoing the concern. "I hope that a solution is found and that the country can start taking care of concrete problems in the interests of everyone."
President Giorgio Napolitano, who would have to decide whether to call new elections or seek to build a new coalition if the PDL withdraws support, has made it clear he does not want a new vote less than a year after the last election.
In an interview with the conservative Il Tempo newspaper on Sunday Gaetano Quagliariello, a PDL minister generally considered a moderate, played down the risk of a crisis.
"I don't think snap elections at this moment would help either the country or Berlusconi," he said.
Berlusconi's lawyers have appealed to the European Court of Human Rights to strike down the so-called "Severino law" which bans politicians convicted of serious criminal offences from parliament and the PDL wants the Senate committee to delay any vote while the court decide.
How quickly the committee reaches a decision remains open but the PD has rejected any attempt at what it calls time-wasting and says the law as it stands must apply to everyone.
Behind the apparently intractable positions, however, there may be scope for an arrangement which allows more time to work out a deal that could avoid a definite break.
Fabrizio Cicchitto, a former PDL floor leader in the lower house told the right wing Libero newspaper, which is generally close to Berlusconi, that much would depend on how the committee meeting plays out.
A discussion cut off in a couple of days, turning the committee into a "firing squad", would be a "provocation". But if PD members took time to discuss the status of the Severino law "we should maintain our support for the government."
"We can act in reaction, that's one thing, but if we in the PDL were the first ones to set off the crisis, we would be making a serious mistake," he said.