ROME (Reuters) - Even in a time of deep economic crisis, the promise of a jackpot lurks on every Italian street corner.
In one central neighborhood near the ancient walls of Rome, one can gamble at a slot-machine and bingo parlour in a former cinema, at a bar with chirping video-betting games, at a hall for horse races, at a tobacco shop that sells a dozen varieties of lottery tickets and even at a local post office that sells scratch-and-win cards - all in a two-block radius.
Italy is now Europe's biggest gambling market and one of the biggest in the world, undermining consumer spending in the euro zone's third-largest economy at a time of severe recession and pushing a mounting number of gambling addicts onto the streets.
"In today's slightly desperate Italy, people gamble in hopes for a miracle," Andrea Riccardi, Italy's minister for international cooperation and integration, told Reuters.
Riccardi is a founder of Sant'Egidio, a Christian charity in Rome that has been increasingly flooded with problem gamblers since Italy started to relax regulations around the gaming industry two decades ago.
At first the new industry generated welcome state revenue and undercut the illegal gambling market dominated by organized crime, Italy's most destructive economic and social problem.
But revenues have risen only marginally while turnover more than quadrupled since 2001 to 80 billion euros last year, and the mob has simply shifted into legal gambling.
Government ministers like Riccardi and some lawmakers argue that deregulation has gone too far and want more rules, but no one is proposing a dramatic reversal.
For Prime Minister Mario Monti, who came to power in November promising to overhaul Italy's moribund economy through deregulation, the story of gambling liberalization is a cautionary tale.
Gambling deregulation began in 1992 when Italy was in dire need of fresh tax revenue during an economic crisis much like the one it finds itself in today. It gathered pace under Monti's predecessor, Silvio Berlusconi, when he took power in 2001.
But receipts are not rising at the same rate as revenues.
Tax revenue was more than 8.5 billion euros last year but increased by less than 3 billion euros between 2001 and 2011 while total consumer spending on gambling rose by 60 billion euros, data from the state agency overseeing the industry show.
Italians pay a 21 percent sales tax on most non-food consumer goods, but gambling ventures enjoyed low taxes to create incentives. The average tax on gaming revenue was less than 11 percent in 2011.
While many economists forecast Italy's economy will contract by about 2 percent this year, gambling revenue is expected to rise by more than 12 percent to more than 90 billion euros - 5 percent of the nation's annual gross domestic product.
Estimates circulated within the Italian gaming industry indicate Italy generated about a quarter of the entire world's $368 billion gaming revenue in 2010.
Unlike a manufacturer of consumer goods, "gaming produces no wealth. It redistributes it," said Luigi Guiso, an economist at the Einaudi Institute for Economics and Finance in Rome.
Fiat, excluding its American unit Chrysler, had less than half the revenue of the gambling industry last year, but car production supports a network of other industries that create about a million Italian jobs, 10 times those in gaming.
"When there's a recession, more consumer spending is needed to overcome it. But the gambling industry is sucking demand out of the economy," said Maurizio Fiasco, a sociologist and one of the leading experts on Italy's gaming industry.
Massimo Passamonti, the president of Confindustria Sistema Gioco Italia which represents gaming companies in Italy, denied his industry was a drag on the economy.
"Just to take one example, the number of skilled workers directly employed in the sector in the last few years has more than tripled: in 2004 there were about 6,000, now there are over 20,000 in total," he said. Another 80,000 were indirectly employed by the sector, he said.
Before liberalization, Italian gambling was limited to lotteries or filling out a "schedina", or betting slip, to wager on the Sunday afternoon soccer games.
Other games of chance were limited to the country's four legal casinos in the vacation spots of Venice, San Remo, Saint Vincent and Campione d'Italia - establishments that have suffered tough times since the state began to legalize slot machines, sports betting and online gambling.
Buyers of state concessions were awarded low tax rates that permitted them to set high payout percentages in order to stimulate interest in new games.
That means that a slot or online player would receive several small payouts that created a "cognitive trap," or the illusion that the odds could be beat, according to Fiasco, who is also a sociologist for the national usury consultancy.
The result is that more people play than ever before, 700,000 Italians are addicted to gambling and the country's 400,000 video slot machines now account for more than half of all betting, according to Eurispes, a Rome-based research institute that studies politics, economics and social issues.
"You lead people to ruin like this," said Marco Dominioni, a slot-machine gambling addict who amassed huge debts, became estranged from his family, and ended up on living on the streets.
The 53-year-old Dominioni was one of 21 people seated at Prime Minister Monti's table during a May visit to a Rome soup kitchen for the poor run by the Sant'Egidio charity.
"The big gambling halls should be closed down. All slot and video machines should be gotten rid of. Slot machines are devastating," Dominioni said over a cup of coffee in one of the few bars in his neighborhood that has no slots.
Dominioni's story is typical of problem gamblers, no matter the country, but the story of the winners is more unique to Italy.
During the first three months of the year, as consumer spending fell and the recession deepened, Lottomatica, the country's only publicly traded concession owner, had a record quarter, with Italian machine wagers gaining more than 35 percent to 3.2 billion euros, chief executive Marco Sala said.
Both of Europe's top two bookmakers, Paddy Power and William Hill, opened online casinos here in the past year.
But the biggest winners are the mafia clans, according to a report by parliament's anti-mafia commission published a year ago.
Organised crime is a pathological and seemingly insoluble problem that has weighed on Italy's real economy for more than 150 years.
The mob proved its resilience once again in its response to the challenge of gaming liberalization. When slot machines were made legal, the mafia simply invested in legal gambling concerns.
The Sicilian Mafia, Calabria's 'Ndrangheta and the Camorra near Naples have set up legitimate gambling businesses all over Italy with the help of front men without criminal records, the commission said.
"Legal gambling ... because of the guaranteed high income levels and the relatively low judicial risk, has by now become the new frontier for organised crime," Gianfranco Donadio, a magistrate in the national anti-mafia prosecutor's office, told the commission.
Donadio said that the mob was using the gaming industry to launder billions of euros gained illegally through drug trafficking, arms smuggling, prostitution, loan sharking, and racketeering.
Italian authorities have prosecuted dozens of cases that involved mafia investments in legal gaming companies in recent years, but mob-controlled companies are often hard to identify and new ones are formed every day.
Illegal money flows are easily concealed in all-cash revenues, and money laundering is hard to prove because notes must be tracked from their criminal origin to their use in the real economy.
"Italy's gambling system is perverse," said lawmaker Laura Garavini, the head of the Democratic Party's (PD) contingent in the anti-mafia commission.
"There's no doubt that more rules are needed to better regulate the industry."
But just as liberalization can benefit the wrong people and does not always bring tax windfalls, the gaming example also shows vested interests in parliament can make it hard to undo.
Garavini is one of a handful of lawmakers who is seeking new rules for the gambling market, but no one is proposing reversing what has already been legalized, for example by closing down slot machines in bars as France has done.
Garavini is backing a law that would regulate advertising, officially denominate problem gambling as a sickness covered by the state health-care system and forbid ownership of concessions by anyone with family ties to the mob.
Cooperation Minister Riccardi also says he wants to pass new rules to regulate advertising and warn of the risks by clearly posting the probability of winning for each type of game.
"Everyone should be able to live and spend their money as they would like, but don't we have the duty to make them conscious of the risk they are taking?"
Garavini, a member of one of the main parties supporting Monti, is lobbying the government to take a harder line, especially against the mob, but she admits that there is no political support for a major overhaul of the industry.
"The gambling lobby is strong in parliament," she said, explaining that the government allowed a measure to be removed from a decree earlier this year that would have restricted family members of mobsters from owning concessions.
"The government makes positive statements, but those statements need to be followed by actions," Garavini said.
Additional reporting by Naomi O'Leary in Rome and Emilio Parodi in Milan; Editing by Sonya Hepinstall and Philippa Fletcher