An unstable Italian economy could, some argued, revive the European financial crisis, which had lain dormant for months.
But such fears eased somewhat as a split emerged in Berlusconi's party over whether to pull the plug on the government.
At least four of the ministers who quit have said they are considering giving their support to Letta in Parliament. There were also signs of a challenge to Berlusconi's leadership from his political heir, Interior Minister Angelino Alfano. Alfano was reportedly worried about the political repercussions for himself and the Freedom People party of bringing down the government in the middle of a recession for no better reason than to defend Berlusconi in his personal judicial woes.
Dissent among Berlusconi's aides also was fueled by a decision by many senators in Berlusconi's party to quit in protest if a Senate committee later this week votes to strip him of his seat because of his conviction.
"I have expressed strong opposition to our lawmakers' decision to resign," said just-resigned Reforms Minister Gaetano Quagliariello, a longtime Berlusconi stalwart who appeared to be shaping up to be the leader of an influential, disenchanted faction in the media mogul's leadership ranks.
In an interview with one of Berlusconi's networks, Quagliariello urged his center-right colleagues to avoid "the risk of a crisis that would explode for the country and not be understood by our electorate." He said it would be "folly" if his own party brings down Letta's government.
A late-day strategy huddle with Berlusconi and his key lawmakers only yielded confused signals and no immediate way out of the political crisis, said Fabrizio Cicchitto, a former parliamentary whip who has blasted the conservative leader's strategy to make the ministers quit and provoke the parliamentary showdown.
"I asked for a debate, but (the request) was politely blown off," Chicchitto said after emerging from the hours-long meeting.
Participants said Berlusconi did all the talking and quoted him as offering to back Letta for "seven days," in other words, just enough limited support to pass the stability bill, as well as reverse a sales-tax hike and abolish a property tax, both promises to his electorate.
But Cicchitto indicated that Berlusconi's hardliner tactics had essentially left him with no room to maneuver.
"Either we freeze the ministers' resignations, and in doing so, eliminate the reasons for a confidence vote, or (Berlusconi's) party must vote in favor" of Letta in order to keep the government afloat, so the tax relief can be passed, Cicchitto said.
Further easing concerns about a government collapse, a top leader in Letta's center-left Democratic Party said the government might avoid a make-or-break confidence vote. Instead, it might seek Parliament's approval on specific motions, likely tied to key economic measures and electoral reform that could serve to calm jittery markets.
"It's very likely that what will happen is that individual motions will be voted on" in confidence votes not formally tied to the government' survival, said Dario Franceschini, minister of parliamentary relations.
Should Letta's government fall, the president has said he will make dissolving Parliament his last resort. That means several weeks could go by while the president sees if another coalition can be cobbled together, possibly with moderates defecting from Berlusconi's ranks. That should earn the government enough time to pass a key budget law by mid-October. The law is needed to bring the deficit back within EU limits and avoid sanctions by the European Union.
By the end of the day, the Milan stock index was down 1.2 percent, half as much as it had dropped earlier. The 10-year bond yield a measure of investor wariness was unchanged, having been sharply higher in the morning.
Analysts say that even in the event of a government collapse, financial markets are unlikely to panic. That's mainly thanks to the European Central Bank's promise made 13 months ago to buy the government bonds of heavily indebted countries, if they agree to cut their deficits and debt levels. That means Italy has a backstop from the central bank's theoretically unlimited financial power even if bond investors were to lose faith and start selling Italy's government bonds, the ECB could step in.
Still, while financial markets are "accustomed to dysfunctional and unstable Italian politics, the latest bout of renewed tensions is unwelcome at a time when Italy remains entrenched in a severe and prolonged economic turndown," said Raj Badiani, an analyst at IHS Global Insight.
Letta's office said the premier received a call in the afternoon from German Chancellor Angela Merket, wishing him "political stability for Italy and continuity in the government's work."
The Italian uncertainty is unlikely to seriously threaten the eurozone, for now. The continent's debt crisis has been subdued since the ECB made its promise last year to do "whatever it takes" to save the euro.
The eurozone economy is also "less fragile than it was six months ago," economist Christian Schulz from Berenberg Bank wrote in a note to investors. "That reduces the risk that contagion could again spread like wildfire across the eurozone."
That holds, however, only so long as the political turmoil does not prevent Italy from being able to agree to the deficit reductions that would be required to get the ECB's help in the bond markets.
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McHugh contributed from Frankfurt, Germany
