Italy PM Letta warns coalition allies as tension mounts

By Silvia Ognibene

SARTEANO, Italy (Reuters) - Italian Prime Minister Enrico Letta took his ministers to a conference center in a former abbey in Tuscany for a retreat on Sunday to thrash out differences that have already threatened the stability of his fragile coalition.

The two-day bonding session near the town of Sarteano was billed by Letta's office as a chance to discuss some of the thorniest policy issues facing the coalition between the main traditional rivals on the left and right of Italian politics.

As well discussing major reforms to the dysfunctional electoral and parliamentary system, the cabinet must also find a way to reconcile differences over billions of euros worth of tax cuts promised by the center-right but resisted by the left.

The encounter will also give Letta an opportunity to try to calm the mounting tensions that have appeared in his new government, formed last month after weeks of wrangling in the wake of February's deadlocked election.

Only two weeks after the government was formed, senior members of Letta's center-left Democratic Party (PD) took aim at their partners in Silvio Berlusconi's People of Freedom party (PDL) following a fierce attack on magistrates by the 76-year-old media tycoon at a rally on Saturday.

"It's quite clear that this demonstration complicates the relationship and not just between the PD and PDL but between all the parties," PD deputy Economy Minister Stefano Fassina told the daily La Stampa.

It was noted that Interior Minister Angelino Alfano, the PDL party secretary, attended the demonstration against magistrates who rejected an appeal by Berlusconi against a four year tax fraud sentence last week.

However the remarks were brushed off by PDL politicians including Agriculture Minister Nunzia de Girolamo, who said the rally was no different from a meeting of PD leaders on Saturday to choose a new party secretary.

"They hold assemblies in rooms inside, we're out in the squares, with the people," she told reporters as she arrived at the meeting.

TENSIONS

The fractious atmosphere has increased the problems facing Letta and raised doubts over the durability of his government, despite assurances from Berlusconi that he does not intend to withdraw support.

Behind the barbs, the coalition faces wide differences over tax policy which must be resolved to win extra budget leeway from the tight constraints imposed on Italy by the European Union's excessive deficit procedure.

Letta has pledged to focus on cutting youth unemployment of nearly 40 percent and restore growth to the sinking economy but he has little room for new spending given the huge burden of public debt, now around 130 percent of Italy's economic output.

EU authorities are due to decide this month whether to take Italy out of the excessive deficit procedure but approval could be endangered by the PDL's insistence on scrapping an unpopular housing tax that brings in 4 billion euros a year.

Letta's PD says it is more important to cancel a 1 percentage point increase in sales tax due to take effect in July and the government has agreed only to suspend payments of the housing tax due in June.

So far, however, there has been no agreement on how to pay for the cuts as well as urgently needed measures to fund special unemployment benefit programmes without pushing the budget deficit past EU limits.

In a bid to calm the tension, Letta's spokesman said on Sunday the coalition partners had agreed that ministers would henceforth not take part in electoral rallies or television talk shows not connected with their portfolios.

However Berlusconi's legal woes are likely to continue to overshadow the government, with a hearing in his trial on charges of paying for sex with a minor set for Monday.

Opinion polls continue to show the center-right holds a lead, with a survey by the ISPO institute in the Corriere della Sera showing Berlusconi's alliance on 35.6 percent ahead of the combined center-left on 29.6 percent and the anti-establishment 5-Star Movement on 24.1 percent.

(Writing by James Mackenzie; Editing by Giles Elgood)

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Malaysia coalition extends rule despite worst electoral showing

By Stuart Grudgings and Al-Zaquan Amer Hamzah

KUALA LUMPUR (Reuters) - Malaysia's governing coalition extended its half-century rule despite its worst-ever performance in a general election, potentially undermining Prime Minister Najib Razak and exposing growing racial polarization in the Southeast Asian nation.

Najib, 59, could come under pressure from conservatives in his ruling party for not delivering a stronger majority in Sunday's election despite a robust economy and a $2.6 billion deluge of social handouts to poor families.

The National Front won 133 seats in the 222-member parliament, down from 140 in 2008 and well short of the two-thirds majority that Najib had aimed to capture. The opposition won 89 seats, up from 82 last time.

Kuala Lumpur's stock market could gain on Monday on investor relief that the untested opposition failed to take power, but any optimism could be tempered by the prospect of political uncertainty due to the weak win. The Malaysian ringgit surged to a 10-month high early on Monday.

While support for the ruling coalition from majority ethnic Malays remained solid, ethnic Chinese who make up a quarter of Malaysians continued to desert the National Front, accelerating a trend seen in the previous election.

Ethnic Chinese have turned to the opposition, attracted by its pledge to tackle corruption and end race-based policies favoring ethnic Malays in business, education and housing.

"We will work towards more moderate and accommodative policies for the country," a grim-faced Najib told a news conference after the majority was confirmed. "We have tried our best but other factors have happened ... We didn't get much support from the Chinese for our development plans."

Former Prime Minister Mahathir Mohamad, still a powerful figure in the dominant United Malays National Organisation (UMNO), told Reuters in an interview last year that Najib must improve on the 140 seats won in 2008. Najib could face a leadership challenge from within UMNO later this year as a result of falling short.

ANWAR CRIES FOUL

The National Front also failed to win back the crucial industrial state of Selangor near the capital Kuala Lumpur, which Najib had vowed to achieve.

The three-party opposition alliance led by former deputy prime minister Anwar Ibrahim had been optimistic of a historic victory, buoyed by huge crowds at recent rallies.

But as counting went late into Sunday night, it became clear that the fractious opposition would be unable to unseat one of the world's longest-serving governments and pull off what would have been the biggest election upset in Malaysia's history.

After claiming an improbable early victory, Anwar later said he rejected the result because the Election Commission (EC) had failed to investigate evidence of widespread voter fraud.

"It is an election we consider fraudulent and the EC has failed," he said.

The National Front has significant advantages, including its deep pockets, control of mainstream media, and an electoral system skewed in its favor.

"The new government does have a credibility deficit at the very moment due to the very tenacious and contentious election process," said Oh Ei Sun, a senior fellow at the S. Rajaratnam School of International Studies in Singapore.

"I think they have to redouble their efforts in rebuilding their trust among the people."

Anwar had accused the coalition of flying up to 40,000 "dubious" voters, including foreigners, across the country to vote in close races. The government says it was merely helping voters get to home towns to vote.

The opposition also lost control of the northern state of Kedah, one of four it had taken over in the 2008 success.

The 2008 result signaled a breakdown in traditional politics as minority ethnic Chinese and ethnic Indians, as well as many majority Malays, rejected the National Front's brand of race-based patronage that has ensured stability but led to corruption and widening inequality.

Ethnic Chinese parties affiliated with the National Front suffered heavy losses in 2008 and were punished by voters again on Sunday. The National Front's ethnic Chinese MCA party won just five seats, down from 15 in 2008, according to the latest count.

That leaves the National Front dominated more than ever by ethnic Malays, who make up about 60 percent of the population, increasing a trend of racial polarization in the country.

"There needs to be an effort to look back at racial harmony," said Khairy Jamaluddin, the head of UMNO's youth wing and a member of parliament. "We don't want the results to be looked at through a racial lens."

(Additional reporting by the Reuters Kuala Lumpur bureau; Writing by Stuart Grudgings and Niluksi Koswanage; Editing by Jason Szep and Paul Tait)

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Key India government ally withdraws from coalition

NEW DELHI (Reuters) - A key regional ally pulled out of India's ruling coalition on Tuesday in protest against the government's position on a U.S.-backed United Nations resolution on war crimes carried out during Sri Lanka's civil war.

The Dravida Munnetra Kazhagam (DMK) is based in the southern state of Tamil Nadu, and has often pressured the Indian government to do more to protect Sri Lanka's minority Tamil population.

The DMK has 18 seats in the lower of house of parliament as part of Prime Minister Manmohan Singh's coalition, which already rules in a minority. Singh's Congress party can continue to govern with parliamentary support from two other regional parties.

(Reporting by Matthias Williams, editing by Ross Colvin)

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Netanyahu faces rocky future in new coalition

JERUSALEM (AP) — Forced to rely on the support of two fast-rising rivals in his new governing coalition, Prime Minister Benjamin Netanyahu now faces a reshaped and rocky landscape that could spell trouble ahead: An unwanted culture war with the country's ultra-Orthodox minority as well as pressure to make peace overtures to the Palestinians.

After weeks of difficult negotiations, Netanyahu, who barely hung onto his job, was forced to cede significant power to his new partners, liberal former TV anchorman Yair Lapid and his unlikely ally, pro-settlement hard-liner Naftali Bennett.

Both men make no secret that they want to be prime minister one day, and each can bring down the government at will.

This new constellation is expected to force the cautious Netanyahu, who presided over a broad and stable coalition during his previous four-year term, to confront some of the nation's most contentious issues.

Both Lapid and Bennett have vowed to end years of preferential treatment for the country's small but politically powerful ultra-Orthodox minority. Lapid and the junior partner in the coalition, former Foreign Minister Tzipi Livni, will also put heavy pressure on Netanyahu to take a softer line toward the Palestinians. With President Barack Obama visiting next week, Netanyahu could be forced sooner than later to make difficult decisions about the Palestinians.

"The next term will be one of the most challenging in the history of the state," Netanyahu said Thursday. "We are facing great security and diplomatic challenges."

The ultra-Orthodox minority makes up roughly 8 percent of the country's 8 million people. Because of Israel's coalition system, their political parties have traditionally wielded power far beyond their numbers by guaranteeing a string of prime ministers a parliamentary majority.

Ultra-Orthodox political parties have used their kingmaker status to secure vast budgets for their religious schools and seminaries and to win automatic exemptions from compulsory military service for tens of thousands of young men to pursue religious studies. Older men collect welfare stipends while continuing to study full time.

The system has led to high rates of unemployment in the ultra-Orthodox community, and has bred widespread resentment among the general public. Attempts by ultra-Orthodox activists to impose their customs on broader society, such as pushing for gender-segregated buses, have further angered the public.

Both Lapid and Bennett tapped into this resentment to make great gains in the Jan. 22 election, promising to bring a "sharing of the burden" of military service and paying taxes. Lapid's Yesh Atid Party, running in its first election, emerged as the second-largest faction in parliament, with 19 of 120 seats. Bennett's rejuvenated Jewish Home captured 12 seats.

Netanyahu's Likud-Yisrael Beitenu bloc won 31 seats. Although it's the largest single faction, it is well below its 42-seat level in the previous parliament and far short of the 61 seats needed for a majority. With Lapid, Bennett and Livni's dovish "Movement" on board, Netanyahu controls a 68-seat majority.

Tough negotiations lasted nearly six weeks before it was finalized Friday, just a day ahead of a deadline that could have triggered new elections.

"Indeed, the new government is not what its leader had hoped for. He did everything he could to flee it, as if from a place plagued by boils, locusts, lice and pestilence. These were not the partners he had hoped for: He did his utmost to keep them out of the coalition, and they taught him a thing or two," wrote Yossi Verter in the liberal Haaretz daily.

"He is the Old Guard, they are the new. He, poor guy, will soon be history," he wrote.

In a sign of how tense the talks were, the negotiating teams decided not to hold a formal ceremony to sign the agreements, Yuval Karni reported in the more mainstream Yediot Ahronot paper. It was decided that the agreements would be signed by fax, so that the representatives of the parties would not even see each other at a signing ceremony.

The weeks of negotiations illustrated Netanyahu's limited room for maneuvering, and the significant leverage his partners will wield.

Forming a joint front, Lapid and Bennett forced the prime minister to keep the ultra-Orthodox parties, his traditional ally, out of the coalition. It is only the second time in the past 35 years that they have been in the opposition.

Lapid, a critic of excessive government spending, also forced Netanyahu to scale back the size of the Cabinet. The move had the added effect of infuriating members of Netanyahu's Likud Party by reducing the number of available Cabinet posts.

In a statement Thursday, Yesh Atid said its first order of business would be to submit a bill on reforming the draft system. It also said it would require all schools to teach a "core curriculum" that includes math, science and English. Ultra-Orthodox schools have frequently neglected these areas. The statement also promised "extensive economic steps" to integrate the ultra-Orthodox into the work force.

Lapid's party will control the finance and education ministries, giving him significant influence over budget and school policies. But taking away benefits from the ultra-Orthodox will not be easy. Netanyahu will be reluctant to take on his traditional allies, knowing he could rely on them again in the future.

The ultra-Orthodox, who have been able to mobilize tens of thousands of people into the streets, are already promising to put up a fight. "Our first mission is to topple this government," Arieh Deri, leader of the ultra-Orthodox Shas party, told Israel's Army Radio station.

Dealing with the Palestinian issue will be no easier. Netanyahu's own Likud Party is dominated by hard-liners who oppose significant concessions to the Palestinians, while Bennett, a former head of the West Bank settler movement, takes an even tougher line, calling on Israel to annex large chunks of West Bank territory that would have to be part of any future Palestinian state. He is sure to use his control over the Housing Ministry to try to build more settlement homes.

On the other hand, Lapid announced Thursday that the new coalition agreement promised a commitment to returning to the negotiating table with the Palestinians. Livni, who is to be Netanyahu's chief negotiator, ran for office on a platform devoted to reaching peace.

Netanyahu will be hard-pressed to balance these conflicting forces, yet there are some reasons for optimism.

After presiding over four years of deadlock and international isolation over the issue, Netanyahu has signaled he is eager to restart negotiations under his new government.

The Palestinians demand all of the West Bank, east Jerusalem and Gaza Strip — areas captured by Israel in the 1967 Mideast war — for a future state. They have demanded a freeze in settlement construction and a commitment to make Israel's 1967 lines the basis for a future border.

Saeb Erekat, the chief Palestinian negotiator, said the Palestinians would have "no problem" talking to Lapid or Livni.

"But if we want to negotiate with the Israelis, the government should accept the two-state solution based on the 1967 borders and implement its obligations like the settlement freeze" he said.

The arrival of Obama next Wednesday could raise pressure on Netanyahu to float some new ideas for restarting talks. Though Obama is not bringing any bold peace plan, he will be meeting separately with both sides in order to lay the groundwork for future talks.

"Netanyahu is going to have Obama visiting next week in Jerusalem and therefore he had to have a more moderate, at least by outlook, government," said Gayil Talshir, a political scientist at Hebrew University. "So the government in terms of Livni getting to be a minister in this government and Lapid being more moderate, it's definitely more moderate when you look at it from the outside."

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Netanyahu seeks time to build new Israeli coalition

JERUSALEM (Reuters) - Deadlocked talks with potential coalition partners have forced Israeli Prime Minister Benjamin Netanyahu to seek more time to build a new government and avert a possible snap election, officials said on Friday.

They said Netanyahu would meet President Shimon Peres on Saturday to ask for a two-week extension after his right-wing party, the narrow victor in Israel's January 22 ballot, exhausted the standard four weeks allotted to build a coalition.

Peres is expected to accept Netanyahu's request.

However, should the rightist premier fail to win enough allies for a parliamentary majority by March 16, the president could hand the task to a rival party leader. If no government emerged then, Israelis may have to return to the polls.

U.S. President Barack Obama is due to visit Israel at the end of March.

Netanyahu's trouble building a new government raises the question of whether he may call off that visit. But when asked about Israeli reports he might cancel, an official in Washington, speaking on condition of anonymity, said there was no talk at this point about the possibility of scrubbing the trip.

White House spokeswoman Bernadette Meehan said: "President Obama looks forward to travelling to Jerusalem, Ramallah and Amman later this month."

Netanyahu's Likud-Beitenu ticket won 31 of the Knesset's 120 seats in the January vote - an eroded lead that required he cast a wide net for partners while juggling their disparate demands.

He has faced strong demands from the parties that placed second and fourth, Yesh Atid (There is a Future) and Bayit Yehudi (Jewish Home), to cut back mass exemptions from military conscription and welfare stipends to ultra-Orthodox Jews.

David Shimron, Likud Beitenu's negotiator, said before meeting Bayit Yehudi on Friday that Yesh Atid was "ruling out" sitting in government with the ultra-Orthodox. Yesh Atid has not disputed that characterization.

"We need to clarify this and other matters with Bayit Yehudi," Shimron told reporters. "In the end of the day, we have to build a government, and we do not accept the invalidation of a sector that is part of the Israeli people."

Netanyahu's outgoing coalition includes two ultra-Orthodox parties which have generally backed him on other policies such the settlement of occupied West Bank land in defiance of world powers, who support the Palestinians' drive for statehood there.

Bayit Yehudi is even less accommodating of the Palestinians than Netanyahu, who says he wants to revive stalled peace talks. By contrast, Yesh Atid says Israeli diplomacy is too listless.

(Additional reporting by Matt Spetalnick in Washington; Writing by Dan Williams; Editing by Crispian Balmer and Michael Roddy)

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Egypt's main opposition coalition to boycott vote

CAIRO (AP) — Egypt's main opposition coalition announced on Tuesday it will boycott upcoming parliamentary elections, a decision likely to deepen the nation's political crisis and worsen an already troubled economy.

The announcement by the liberal and secular National Salvation Front was announced in a televised news conference just hours ahead of the start of a "national dialogue" called for by President Mohammed Morsi to find ways to ensure the "transparency" and "integrity" of the vote.

Leading front member Sameh Ashour, who also heads Egypt's lawyers' union, announced the decision and said the front was also boycotting Tuesday's dialogue.

"We tell Morsi" 'dialogue with yourself. Dialogue with your party'," he said. "The Egyptian people will not accept a dialogue that is imposed."

Called by Morsi last weekend, the elections will start in April and be staggered over a two-month period. Egypt's last legislature was elected in late 2011 and early 2012 but was dissolved by a court ruling in June, leaving the then-ruling military with legislative powers. Morsi took over the powers in August, then passed them in December to the Islamist-dominated upper chamber known as the Shura Council.

The opposition has been calling on Morsi to defuse the nation's political crisis before calling for elections to prevent the country from plunging deeper into chaos. It wants a "neutral" government to replace the one led by Islamist Hesham Kandil, and for steps to be taken to ensure the independence of the judiciary.

The opposition also objects to an election law that was adopted this month by the Shura Council, arguing that it favored the Islamists, particularly Morsi's Muslim Brotherhood.

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