Silvio Berlusconi, Italy's prime minister, was on Tuesday facing a bruising confrontation with the European Commission, as its patience with his handling of his country's finances snapped.

Mr Berlusconi was warned by the European Commission that it would start formal action against Italy before the end of June over the country's rising budget deficit.

The challenge could be even more uncomfortable for Mr Berlusconi if the Commission concludes as expected that Italy has under-reported the size of its deficit in the past.

Joaquin Almunia, the EU monetary affairs commissioner, regards Italy's economic situation as the most precarious in the 12-country eurozone.

But attempts by Brussels to rein in Italy's borrowing come as Mr Berlusconi eyes income tax cuts of ?12bn ($14.04bn) ahead of a general election due in 2006.

Mr Almunia, speaking at an EU finance ministers meeting in Luxembourg, said he expected the Commission to launch action against Italy under the revised stability and growth pact ?probably before the end of June?.

The move will switch the EU's focus from the long-running budget battles with France and Germany both of which claim to be bringing their deficits below the pact's 3 per cent ceiling to what many regard as a longer-term problem.

?Italy is the country which keeps us awake at night,? said one EU official on Tuesday. If a Commission report on Italy's ?excessive deficit? is accepted by member states, the EU would issue recommendations to bring it under control.

Earlier this month Mr Almunia published the Commission's spring forecast which projected an Italian deficit of 3.6 per cent of gross domestic product in 2005 and 4.6 per cent in 2006.

The commissioner does not believe official Italian figures or forecasts; Eurostat, the EU statistics office, refused to certify Italian data from 2003 and 2004 which showed the country at 2.9 per cent and 3.0 per cent respectively, and is expected to revise the numbers soon.

Mr Almunia wants to show that the revamped stability pact substantially weakened at an EU summit last month can still exert peer pressure on countries to run sound fiscal policies.

But Domenico Siniscalco, finance minister, said yesterday it was premature to talk of supplementary fiscal measures in the next few months to control the deficit, and contended that Italy's real problem was low economic growth.

Mr Berlusconi's ability to push through tax cuts has become more limited after a disastrous performance in regional elections on April 3-4 in which Forza Italia, his party, did much worse than its three coalition allies.

Italy has relied heavily on one-off revenue-raising measures, such as tax amnesties, to keep down its deficit since Mr Berlusconi came to power in 2001. Its problems are compounded by a debt-to-GDP ratio of 106 per cent second only to Greece in the eurozone and nearly twice that of France and Germany - and an almost stagnant economy.

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