By Roberto Landucci

ROME (Reuters) - A Senate committee deciding whether to expel Silvio Berlusconi from parliament over a criminal conviction debated the political future of Italy's former premier, but avoided an early showdown that many had feared would topple the government.

The cross-party committee, which must vote on whether 76-year-old Berlusconi can remain a lawmaker after being convicted last month of tax fraud, has become the latest focus for tensions in Prime Minister Enrico Letta's left-right coalition.

The 23-member panel is dominated by adversaries of Berlusconi from Letta's center-left party and the anti-establishment 5-Star Movement, with at least 14 expected to vote against the billionaire politician. Berlusconi's center-right People of Freedom (PDL) party has threatened to pull out of the ruling coalition in protest if its leader is stripped of his seat in the Senate.

The closed-door session began with tactical skirmishes over whether or not to delay proceedings until an appeal by Berlusconi's lawyers to the European Court of Human Rights could be heard, according to Michele Giarrusso, a 5-Star Movement committee member who took a break from the talks.

The committee's work is expected to take a few weeks and Berlusconi could not be expelled without a full vote on the floor of the upper house.

So far, Letta's center-left Democratic Party (PD) has insisted that Berlusconi cannot remain in parliament after Italy's top court convicted him of being at the center of a vast tax fraud scheme at his Mediaset television empire.

The PDL says Berlusconi, sentenced to four years in jail, has been targeted unfairly by left-wing magistrates and accuses the PD of using judicial tactics to eliminate a rival it has been unable to defeat politically.

Financial markets have been increasingly on edge as political tensions have escalated, pushing up government borrowing costs ahead of the next auction of medium-term bonds on Thursday.

PROCEDURAL DELAYS

With Italy struggling with a 2-trillion-euro public debt and mired in its longest recession since World War Two, business leaders warned that political turmoil could snuff out the first glimmers of a turnaround.

"Political stability is a pre-condition for economic recovery, and if there were to be a crisis, the recovery would be at risk", Federico Ghizzoni, chief executive of Unicredit, Italy's largest bank by assets, said at the weekend.

The PD and PDL have been at odds ever since they were forced together into an unwilling coalition following weeks of wrangling in the wake of last February's parliamentary elections.

However they have overcome apparently unbridgeable differences before, notably in last month's deal to scrap a deeply unpopular housing tax despite disagreement over how to fill a 4-billion-euro annual funding gap.

Berlusconi's lawyers, who have appealed to the European Court of Human Rights, argue that the "Severino law" under which convicted politicians are ineligible for parliament, cannot apply in his case because it was passed last year, after the events over which he was convicted.

The PD has rejected calls for the committee to delay proceedings until the European Court or Italy's own constitutional court rules on the Severino law, accusing the PDL of trying to waste time with groundless appeals.

As the maneuvers continue, President Giorgio Napolitano, who has played a decisive behind-the-scenes role in Italian politics since the Berlusconi crisis erupted, may play a significant part again.

He has made it clear that he would be unwilling to call new elections and may seek to shepherd in a new coalition government if the center-right withdraws support for Letta.

Whatever the outcome of the committee meeting, Berlusconi faces months in the political wilderness, which could prevent him standing in any election if the government falls.

His four-year jail term, commuted to one year because of his age, would also prevent his participation in national politics if elections are called this year.

(Editing by Ralph Boulton)