An investigation into fraud and illegal funding at Italy's Northern League party is undermining the leadership of founder Umberto Bossi and could end up weakening the main political force opposing Mario Monti's government.

Northern League treasurer Francesco Belsito, a former bouncer who had become a Bossi protegee, resigned on Tuesday after prosecutors alleged he had used party funds to pay for, among other things, the remodelling of Bossi's villa and holidays for the leader's children.

Bossi has denied ever using party funds for his own benefit.

But commentators said his hold over the party could be threatened by the scandal, which has already heightened public exasperation over the state of Italy's political parties, to the advantage of Monti's technocrat government.

The scandal could strengthen widespread sentiment among Italian voters that all parties are corrupt, prompting many to believe Italy can live without them, said Luca Comodo, who heads the political department of research and polling centre IPSOS in Italy.

Many voters are starting to say they would like Monti to stay on.

The allegations by the Milan prosecutors office are the most serious of a series of graft scandals to hit the populist Northern League, which gained prominence 20 years ago due to its vehement attacks against the corrupt ways of Italy's capital, dubbed Robber Rome.

No one was immediately available for comment from the Northern League. But Bossi, asked by ANSA news agency about a meeting of the party's executive council later on Thursday, said the party would name a new treasurer.

Italian media have speculated Bossi could also resign at the meeting.

Bossi and the League have been vocal critics of Monti, whose government was sworn in last November to fight Italy's spreading debt crisis and is supported in parliament by a coalition of parties.

Italy's next general election is due in 2013 and Monti, an internationally respected economist not affiliated to any political party, has repeatedly said he does not intend to run.

Local elections due to take place on May 6-7 will be the first test of voters' mood.

QUEST FOR SUCCESSION

Born as a secessionist regional party with strong ties to the wealthy and industrious Lombardy region, the Northern League openly attacked political corruption in the early days of the Clean Hands anti-graft investigation that swept away Italy's old party system in the 1990s.

Bossi, the closest ally of former Prime Minister Silvio Berlusconi in the previous government, maintained a close grip on the party even after a serious stroke in 2004.

The 70-year old, at the helm of the League since the early 1980s, had been grooming his son Renzo, known by the nickname The Trout, as his heir, securing him a seat within Lombardy regional parliament.

But the elder Bossi has been alienating the party's base and even some high-ranking party officials by favouring a restricted clique of allies, known as the 'magic circle'.

The current scandal is seen benefiting party stalwart and former interior minister Roberto Maroni, who immediately called for the Northern League to clean itself up, and is likely to emerge as an alternative leader.

If the allegations are proven, Bossi is finished. Bossi will quit and Maroni, who is liked at grass-root party level, will become the new leader, political scientist Giovanni Sartori said.

The party will survive in some form, he added.

(Additional reporting by Sara Rossi in Milan; Editing by Andrew Heavens)