Italy's ruling coalition reached agreement on Tuesday on reforms ahead of a European Union summit on Wednesday but a key coalition leader said he was still pessimistic about the future of the government.

Umberto Bossi, leader of the Northern League, whose support is vital to the survival of Prime Minister Silvio Berlusconi's government, said it was up to the EU to decide if the reforms are enough.

In the end we have found a way. Now we will see what the EU says, Bossi told reporters.

But asked if he was still gloomy about the chances of the government surviving disputes over economic reforms demanded by euro zone leaders, Bossi replied: I remain pessimistic.

EU leaders, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Berlusconi present firm plans to promote growth and reduce Italy's massive debt in time for a summit meeting in Brussels on Wednesday.

An emergency cabinet meeting late on Monday ended without agreement after Berlusconi's coalition allies in the Northern League refused to budge on their opposition to raising the pension age to 67 years from 65 at present.

Bossi, who earlier had said the disagreement could bring down the government and force early elections, gave no details on the reforms that would be presented to Brussels but said the League still opposed raising some retirement ages.

Berlusconi, mired in scandal and facing sagging approval ratings, has survived a series of confidence votes with the help of the League but analysts widely believe he cannot last much longer, with many expecting elections next spring.

The threat of a government breakdown comes as Italy takes center stage in the euro zone crisis, with concerns mounting over its ability to keep from losing control over a 1.8 trillion euro debt pile and putting the entire bloc at risk.

The euro zone's third largest economy relies on intervention by the European Central Bank to keep its borrowing costs at manageable levels. As the government has continued to dither over reform, markets have become increasingly nervous.

Yields on Italian 10-year bonds are just under 6 percent, not far short of levels they reached in August when the ECB stepped in and started buying Italian bonds on the market to keep its borrowing costs at manageable levels.

HUMILIATION

As ministers scrambled to hammer out a deal in time for the Wednesday deadline, Matteoli said there would be no cabinet meeting but that Berlusconi might still have proposals to take to Brussels.

If there is an agreement, the prime minister will take it to Europe. We can pass the provision later, he said.

Silvano Moffa, a lawmaker in one of the small coalition parties who was present at one of the meetings on Tuesday, said Berlusconi would send a letter to Brussels with proposals later in the evening.

The League, a regional pro-devolution party with a constituency including many small business owners and pensioners, has been firmly opposed to raising the pension age and Bossi has been under pressure from grassroots supporters increasingly disillusioned with Berlusconi.

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.

Perceived slights, such as a news conference in Brussels where Merkel and Sarkozy exchanged ironic smiles and laughter following a question about whether they were reassured after meeting Berlusconi, have caused some bitterness in Italy.

On Tuesday, President Giorgio Napolitano called on the government to show a credible commitment to reform but said expressions of mistrust at Italy's engagement were inappropriate and unpleasant.

European Commission spokesman Amadeu Altafaj said the Commission had no intention of humiliating Italy but needed details on its reform plans.

Italy, once seen as safe from the crisis because of a relatively low deficit, a conservative financial system and high private savings, saw its debt come under fire from investors in July.

It has since passed a series of reforms, but has failed to convince markets worried that the deep divisions in the government will stymie painful measures aimed at cutting the debt and boosting the stagnant economy. Over recent weeks, the main ratings agencies have all downgraded Italy.

Underlining the gloomy state of the economy, data on Tuesday showed consumer morale in October fell to its lowest level since July 2008.

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

(Additional reporting by Giselda Vagnoni and Alberto Sisto; Writing by Philip Pullella and James Mackenzie; Editing by Peter Graff)

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