Italian Economy Minister Giulio Tremonti laughed off rumors that he was about to resign on Thursday but faced growing pressure over his links to a former advisor who is under investigation for corruption.
Tremonti, widely seen as the guarantor of Italy's financial stability as the euro zone debt crisis has spread, has been closely watched by markets in recent weeks as speculation has grown that his position in the government could be under threat.
He has not been directly implicated in the allegations against Marco Milanese, a close aide now being investigated for graft and influence-peddling by Naples magistrates but until a few weeks ago, he occupied a flat in Rome made available by the former tax official.
According to evidence given by Milanese, Tremonti, who has pledged to crack down on tax evasion, made weekly cash payments of 1,000 euros for the flat from 2008.
Cash payments for large transactions including doctors' and tradesmen's bills, rent and sometimes even house purchases, are common in Italy as a means of avoiding declaring income for tax.
Tremonti, who moved out of the flat earlier this month, declined to comment directly on Thursday, merely joking to reporters that I have resigned ... as a tenant.
He also received the backing of Umberto Bossi, head of the powerful Northern League which is part of the governing coalition, who said the minister would not lose his job over the affair. Absolutely not, Bossi told reporters. [nL6E7IS0YS]
With Italy fighting to prop up its strained public finances and avoid being dragged into the euro zone crisis, the implications of the affair could have a wider impact given Tremonti's unusual place in government.
Openly disliked by many of his colleagues because of his sometimes high-handed manner and insistence on iron budget discipline, his reputation with financial markets has nonetheless ensured that he has been secure from attack.
WHAT TREMONTI HAS NOT SAID
While political scandals involving accusations of bribery and favors are nothing new in Italy, public opinion has turned increasingly against a political elite perceived as out of touch with the struggles many ordinary Italians face.
How many Italians can say they haven't succumbed to temptation, perhaps for small or unimportant items? Who can cast the first stone without being accused of hypocrisy?, Italy's leading daily, the Corriere della Sera said in a front-page editorial entitled What Tremonti has not said.
But the blame is much more serious if it is attached to people who have the institutional obligation to demand fiscal correctness, to set the rules and to punish those who do not observe them.
Whether the affair damages Tremonti seriously may depend on what emerges during the investigation of Milanese, a member of parliament for the ruling PDL party.
One big question. That 1,000 euros a week, was it paid under the counter? Is there a receipt? Libero, a conservative daily fiercely loyal to Berlusconi but hostile to Tremonti said.
Tremonti's proximity to a widening scandal around Milanese over rigged public contract tenders, with eye-catching reports of luxury yachts, expensive watches and other presents his aide is accused of having accepted has raised alarm bells.
I don't want to get into it, Bossi told reporters. Tremonti is ensuring the roof doesn't fall in and he just didn't notice this banana skin, he said.
It's silly but it's nothing very serious, he said.
Naples magistrates have asked to have Milanese's parliamentary immunity lifted so that he can be arrested and questioned and they are also seeking access to mobile phone records and the contents of safe deposit boxes.
Earlier this month, an interview in which Berlusconi made some critical remarks about Tremonti fed speculation of a government split that helped fuel a sharp sell-off in Italian government bonds and bank shares.
Italy's relatively modest budget deficit and generally conservative financial system have kept it clear of any prolonged economic trouble but its public debt level is second only to Greece's in the euro zone.
As the bloc's third largest economy, any serious threat to its stability would have unforeseeable consequences and could threaten the future of the single currency.
On Thursday, Italy sold some 8 billion euros of government bonds, with yields on benchmark 10-year bonds reaching 5.77 percent, the highest since February 2000, hit by general market jitters and not helped by speculation over Tremonti.
It was Berlusconi's comments about Tremonti two weeks ago that had kicked off the attacks on Italy, so it's not surprising that a rumor could have weighed on the auction, said Jean-Francois Robin, a market strategist at Natixis in Paris.
(Additional reporting by Michel Rose in Milan and Giuseppe Fonte in Rome; Editing by Elizabeth Fullerton)