The Italian government is working on an extension of car incentives which will include their gradual phasing out, industry ministry under-secretary Stefano Saglia said in Il Giornale daily on Friday.

We are at work on the eco-incentives and by the end of the month we expect to prepare a first working draft, Saglia was cited by Il Giornale as saying.

The aim is to re-propose them adopting the line of a soft landing, he said, adding that the current incentive system risks becoming a permanent drug.

On Thursday, Italy's light vehicle producer Piaggio SpA (PIA.MI) Chairman Roberto Colaninno said he agreed with Fiat SpA (FIA.MI) CEO Sergio Marchionne who said on Wednesday failure to extend incentives to 2010 would be disastrous.

The cost of the incentives for the state has been offset by additional value added tax on car sales and savings in payments to temporarily laid off workers, he said.

Earlier this week, industry minister Claudio Scajola told the Italian parliament an extension of the incentives was desirable but discussion is premature.

Il Giornale cited auto industry association Unrae saying that without incentives in 2010 car sales would fall to 1.7 million to 1.75 million, from the 2.1 million expected this year. (Writing by Nigel Tutt; Editing by Hans Peters)