* Electoral law blamed for political instability
* Politicians divided on what new system to back
* Issue has potential to bring down government
* Berlusconi seen as a key player in negotiations
The reasons given by Italy's top court for throwing out key planks of the country's electoral law leave politicians no closer to agreeing a new system to give Italy the stable government it badly needs.
As Italy struggles with a huge national debt and a stagnant economy, most politicians agree that the electoral rules that helped produce a hung parliament after last February's national vote are in need of change, but they have squabbled over reform for the best part of a decade.
Prime Minister Enrico Letta's brittle left-right coalition was forced to move agreement on a new system to the top of the agenda after the constitutional court decision in December.
The court had struck down the system of voting for party lists of candidates and the rules that gave the largest coalition an automatic 55 percent of seats - on a national basis in the lower house and regionally in the senate.
In issuing the reasons for its decision late on Monday it said the winner's bonus was "manifestly unreasonable" and open to manipulation by pre-vote deals that need not be honoured after the extra seats are pocketed.
It also said voters should have the right to choose representatives, not simply vote for lists picked and ranked by party bosses.
That leaves all three current proposals for reform - set out by the Democratic Party (PD) leader Matteo Renzi - still on the table.
But there is no obvious majority in parliament for any of the proposals, and the issue has the potential to shatter Letta's government.
Letta, also from the PD, wants a deal to involve all the parties in his coalition in order to preserve its unity, but Renzi, a dynamic 39 year-old, has staked his reputation on forcing consensus, even with opposition parties if necessary.
"Renzi has everything to lose if he can't get a deal, and that is his priority, not the survival of the government," said Elisabetta Gualmini, politics professor at Bologna University and one of Italy's most prominent political commentators.
The issue will he high on the agenda of a meeting of the PD leadership on Thursday, and Renzi is pushing to have a cross-party accord in place by Jan. 27, when the floor of the Chamber of Deputies will begin discussing the reform.
A political balancing act will be needed to forge agreement among a combination of the PD, Silvio Berlusconi's centre-right, the New Centre Right (NCD) led by Angelino Alfano, which are all part of Letta's coalition, and the anti-establishment 5-Star Movement led by former comic Beppe Grillo.
The longer it takes to reach a deal the longer the government is likely to last, leading to Renzi's suspicions that Letta and some of his coalition allies are deliberately dragging their feet.
"We are in a vicious circle because we can't vote without electoral reform but the parties, or at least some of them, can't or don't want to reach a deal," said Gualmini.
The leaders that most definitely do want a deal are Renzi and Berlusconi, who is anxious to see the end of Letta and go to the polls as quickly as possible.
Political analyst and advisor to Renzi, Roberto D'Alimonte, said Renzi would probably be forced to seek an accord with Berlusconi, but that could alienate Alfano, a former Berlusconi ally who led a breakaway group last year.
Without Alfano, the government would fall, but so far Alfano and Berlusconi have pushed for different electoral systems.
"An agreement between Renzi, Berlusconi and Alfano is the only key to achieve an efficient voting system that can endure through time because it has broad support," D'Alimonte said.
D'Alimonte said that of the three options on the table the one most likely to find agreement between Renzi and Berlusconi would be proportional representation (PR) with a large number of small constituencies each electing four or five representatives and a winner's bonus of 15 percent of seats.
But Alfano may be reluctant to back such a system, which rewards larger parties at the expense of smaller ones; his NCD is supported by about 4 percent of the electorate, according to two recent polls.
The second option is a reworked version of the electoral law in place until 2005, with three-quarters of deputies elected directly and the remainder elected by a combination of PR and a winners' bonus.
The third system is a French-style two-round system, close to the one currently used in Italy's mayoral elections, which Alfano says he favours.
If no agreement is found on a reform, future elections would be held under pure PR - the current electoral law but without the elements rejected by the court. That would appeal to Italy's many small parties, including Alfano's, which may be tempted to hamper any attempts at reform.
As the Italian electorate is currently split into three roughly equal blocks, Berlusconi's centre-right, Renzi's centre left and Grillo's 5-Star movement, a vote under the current law would almost certainly fail to produce a workable government.