Italian Prime Minister Silvio Berlusconi is expected to give a European summit on Wednesday only vague promises of economic reform instead of the firm undertakings demanded by European leaders.

Berlusconi has been caught between a tough ultimatum by euro zone leaders and the adamant refusal of his Northern League partners in a centre-right coalition to make more than slight concessions on pensions -- a key plank of the reform programme.

Both Northern League leader Umberto Bossi and analysts said it was unclear whether the Italian promises would be enough to pacify euro zone leaders or markets, but Berlusconi's political position is so weak he has little room for manoeuvre.

Initial reaction from markets was not encouraging, with Italy paying the highest yield in more than three years on six-month BOT bills at an auction on Wednesday.

Political tensions over the reform programme broke into the open in Italy's parliament where opposition and government deputies exchanged blows on Wednesday and the sitting was suspended.

The head of Italy's biggest retail bank, Intesa Sanpaolo, said he was disappointed by the sketchy agreement reached between Berlusconi and Bossi in late-night talks on Tuesday, which provided for only a slight acceleration in increasing the retirement age from 65 to 67.

Bossi and his supporters in the northern devolutionist party refused point blank to sanction a more significant reform that would abolish a system under which workers can retire early if they have paid 40 years of pension contributions.

In the situation we are in, I expected an economic programme that would be agreed by everyone and not just unconfirmed suggestions to take to Europe. I am disappointed, Corrado Passera told reporters at the margins of a conference.

The head of Italy's banking association urged the government to stop delaying reforms that would restore confidence. Now is the time to act and we need to act, quickly and well, Giuseppe Mussari told the same conference.

Berlusconi will take to Brussels a letter of intent outlining Italy's plan for reforms demanded by its EU partners as a condition for European Central Bank buying of its bonds --vital to avoid it being overwhelmed by repayments on its massive debt pile.

LETTER SHORT ON DETAIL

Media reports say the 14-page letter contains little detail on growth-boosting measures but promises to balance the budget by 2013 and lists previously agreed reforms.

Even Berlusconi's chief of staff, Gianni Letta, said the letter was incomplete. It needs some adjustments and finalisation, he told reporters.

Incoming ECB chief Mario Draghi said ideas outlined in Berlusconi's letter must be implemented rapidly. Draghi, who is leaving Italy's central bank to take up the new role, said the situation in Italy was confused and dramatic.

The euro zone's number three economy is at the centre of the debt crisis as investors fret about its sluggish growth and political instability. It needs to issue over 600 billion euros in bonds in the next three years to refinance maturing debt.

In the end we have found a way. Now we will see what the EU says, Bossi told reporters late on Tuesday after a day of difficult talks with Berlusconi.

But Bossi said he was still pessimistic about the survival of the coalition. Berlusconi's office denied on Wednesday that he had made a secret agreement with Bossi to resign at the end of the year.

However, analysts say Berlusconi is unlikely to last beyond December or January and elections are expected next spring, a year ahead of schedule.

Berlusconi has until now repeatedly said he expected to serve out his term until 2013. But reports are circulating that, caught between demands for action on the economy and the obstinacy of the League, he may throw in the towel sooner.

Analysts say neither the League -- where Bossi's leadership is also under threat from within -- nor Berlusconi's PDL party wants a government crisis before the end of the year because that might tempt President Giorgio Napolitano to appoint a stop-gap government of technocrats to pass urgent reforms.

A delay would enable the centre right to keep control of the way the crisis plays out ahead of elections in the spring.

The centre-left opposition is also in disarray and is thought to be reluctant to take responsibility at this point for highly unpopular austerity reforms.

Italy has a public debt of 1.9 trillion euros, equal to 120 percent of GDP, second only to Greece in the euro zone. European nations, Italian business and many other critics say Berlusconi must take urgent and real measures to cut the debt and revive the country's chronically stagnant growth.

The impatience of euro zone leaders at Berlusconi's repeated procrastination is sharpened by fears that a major debt crisis in Italy -- much bigger than Greece and too big to bail out -- would threaten the entire European project.

The three main credit ratings agencies have all downgraded Italy recently.

Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue through steps such as privatisations and a new wealth tax, but the measures have been repeatedly delayed.

Berlusconi has reacted angrily to pressure from Germany and France to enact reforms. He issued a statement on Monday declaring that no EU country was in a position to give lessons to its partners.

Napolitano also criticised the ultimatum, which many Italians see as a humiliation, an impression strengthened by the spectacle of Berlusconi having to write a letter of promises to EU leaders before Wednesday night's summit.

(Additional reporting by James Mackenzie and Alberto Sisto, Giuseppe Fonte and Stefano Bernabei; Editing by Jon Boyle)

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