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ROME (Reuters) - Silvio Berlusconi's decision to stand in Italian elections increases the risk of a large populist bloc in parliament that could severely hinder attempts to continue the legacy of outgoing Prime Minister Mario Monti.
Monti, the man foreign governments and investors desperately want to continue governing Italy, announced his intention to resign on Saturday, soon after Berlusconi's PDL party withdrew its support from his technocrat government and launched a frontal attack on his austerity policies.
Monti's decision followed Berlusconi's announcement that he would stand as the People of Freedom (PDL) candidate in the election expected in mid-February.
Some of the jitters on financial markets since then - which have pushed up the effective interest rate on Italian government bonds - seem to have been prompted by fears that the scandal-plagued media magnate could return as prime minister.
While this is a remote possibility given the PDL's low ratings in opinion polls, there could still be plenty of reason for nervousness.
Berlusconi's tactics appear aimed not at winning the election but to have enough power in the Senate or upper house to make life difficult for the pro-European center-left government expected to succeed Monti. It would also help Berlusconi, who was forced from power a year ago, to protect his troubled personal interests.
This could undermine center-left leader Pier Luigi Bersani's promise largely to continue Monti's prudent economic policies.
"This is Berlusconi's calculation. He hopes to have a hung Senate ... He hopes to be in a situation where he doesn't govern but prevents government," former diplomat and commentator Sergio Romano told Reuters.
Berlusconi seems intent on reviving the fortunes of his faltering party by espousing the anti-Monti rhetoric of the populist 5-Star Movement. This has overtaken the PDL in opinion polls and is now drawing around 20 percent support due to public anger over the pain of a year of deficit-cutting austerity.
Monti has directly rebutted PDL criticism of his austerity policies since the weekend, painting them as ill-informed, and revived his repeated warnings against the danger of anti-European populism. European leaders have lined up to praise him and urge a continuation of his policies.
Since declaring his candidacy, Berlusconi has railed against Monti, accusing him of worsening Italy's situation with his rigid austerity mix of higher taxes and spending cuts.
"The Monti government has followed the Germano-centric policies which Europe has tried to impose on other states and it has created a crisis situation much worse than where we were when we were in government," he told his Canale 5 television.
Romano said Berlusconi wanted to revive his party by taking votes from the same constituency as the 5-Star Movement of foul-mouthed Genoese comedian Beppe Grillo, who calls Monti Rigor Montis and wants a referendum on whether to leave the euro.
Whereas Grillo's movement is web-based, Berlusconi has huge media power through his television and newspaper empire. "Berlusconi has more firepower," said Professor Gianfranco Pasquino of Bologna University.
"Berlusconi reads the polls and sees Grillo has 20 percent. He wants the votes of the angry people," Romano said.
He warned that Berlusconi can never be underestimated, despite problems in his Mediaset broadcasting empire and his legal problems - he is awaiting a verdict early next year in a trial in which he is accused of paying an underage prostitute.
"We have been mistaken many times. We have been burned many times," Romano said.
Berlusconi's return to center stage and Monti's announced resignation have almost certainly scuttled attempts to reform a much maligned electoral law known popularly as the "pigsty".
Berlusconi wanted to keep the law partly because it imposes fixed lists where party leaders rather than the electorate choose members of parliament, ensuring he maintains his power of patronage and control.
Berlusconi's strategy will benefit his center-left enemies in the lower house of parliament where they will probably be guaranteed a strong working majority by a winner's premium - they are currently up to 20 points ahead of the PDL.
But the law also decides Senate seats based on votes in each region and this is where Berlusconi hopes to win enough in its traditional northern strongholds to stymie the center-left.
To this end he is busily working to revive his lapsed alliance with the anti-European and populist Northern League.
"I have to say it is a very, very unpleasant situation because you cannot see an easy way for this to resolve itself without leaving a considerable amount of power and influence in Berlusconi's hands," said Erik Jones, Director of European Studies at Bologna's Johns Hopkins University.
"The goal is not to control the Senate, the goal is to prevent anybody else controlling it. I think he has a good chance. If he can get the League," Jones told Reuters.
While Berlusconi's fortunes are clearly in steep decline and many in his own party are wary of anti-Monti and anti-European policies, the freezing of the current electoral law appears to have restored his grip on a party he created and bankrolled.
Party secretary Angelino Alfano, who as recently as last week looked to have a chance of gathering party moderates around him to lead the PDL into the election, has been humiliated by Berlusconi and is toeing his anti-Monti line enthusiastically.
"Berlusconi will make things very very difficult. The interpretation of the markets is negative, and it is rightly negative," Pasquino told Reuters.
editing by David Stamp