It will be fascinating to see what Mario Draghi, head of the European Central Bank, makes of the Italian situation when he begins a press conference in 20 minutes time (as expected, they have left interest rates unchanged)

Our Southern European editor John Hooper says Berlusconi has saved face, but lost influence:

Enrico Letta definitely looked less than euphoric as Berlusconi yanked hard on the political handbrake, and declared with palpable understatement:

we have decided, not without some internal strife, to support the government.

The general view among Italian political journalists is that Letta would be much better off without Berlusconi around at all. Instead, Letta remains the prime minister of a shaky coalition.

Having said that, Berlusconi is damaged by the antics of the last few days. The remarkable political gymnastics must have taken their toll — and an optimist might argue that PdL is irrevocably on the path to a new future….

The Italian stock market jumped as the news came in, pushing the FTSE MIB up 1.4% today.

Italian government debt prices remain high, with the yield on 10-year bonds down at 4.38% (from 4.46% yesterday).

Here’s the key quotes from Berlusoni, before he threw his support behind Letta a few moments ago.

Berlusconi himself buried his head in his hands after announcing that the PdL party will support Letta — which means today’s confidence vote is a WIN for the prime minister.

It was not the speech of a winner — rather of a man whose long grip on his party may be slipping .

There’s applause in the Senate as Berlusconi says he will support Enrico Letta — although I think I saw Letta pull a rather rueful grin.

Berlusconi’s got the microphone!

Former technocratic prime minister Mario Monti just gave a brisk speech, in which he urged senators not to risk Italy falling into the troika and its “neocolonial oversight”. If Italy is forced to take a bailout, it could take years to recover, Monti warned.

While we wait for that vote, here’s Reuters’ report on Letta’s second speech to the Senate:

Italian Prime Minister Enrico Letta said on Wednesday his government could achieve reforms even with a smaller majority, as he wound up a debate on a confidence vote in which he has been boosted by dissidents from Silvio Berlusconi’s centre-right party.

“Our government can reach its objectives despite the fact that the majority’s numbers have changed,” Letta said as he formally put a confidence motion to the Senate, which is expected to complete the vote in the early afternoon.

Letta spoke at length about Italy’s role in the European Union and his goal to push for greater integration during the country’s rotating presidency in the second half of 2014, suggesting he sees his government lasting at least until 2015.

The vote hasn’t actually started yet. Senators are continuing to give their views. The latest word from Rome is that Berlusconi isn’t expected to speak (but given today’s twists and turns, let’s see).

Rome correspondent Lizzy Davies reports that two distinguished honorary senators, architect Renzo Piano and conductor Claudio Abbado, are both absent because they are out of the country.

A briefer speech from Letta this time — his main message to the Senate is that today is a historic opportunity. Tomorrow the government must get back to work.

Amid applause from some members of the senate, Letta calls for a confidence vote:

Letta still looks calm:

The rumour mill keeps swirling in Italy ahead of this lunchtime’s confidence vote. One insider reckons Berlusconi is going to back Letta, the next says he’s not. Confusion reigns (not for the first, or last time).

John Hooper, our Souther Europe editor, reports that Berlusconi’s rebels are talking of creating a new party called “Popolari per l’Italia” – even if the loyalist wing of PdL join them by supporting Letta.

Plenty of concern in Greece that three Golden Dawn MPs were released from court this morning, and promptly kicked and shoved their way through the assembled media .

Here’s a flavour:

Here’s a photo that appears to show the list of Senators from the People of Freedom party who are considering backing Enrico Letta:

Rumours flying:

It is increasingly likely that Enrico Letta has enough votes for victory, even if Berlusconi decides to back him.

Letta needs 161 votes for victory – although he would like more. Vincenzo Scarpetta of Open Europe reckons that he currently has 170 senators behind him, based on the latest reports and public statements.

Here’s how Barclays summed it up this morning:

Letta has the numbers to survive the vote today. The Government needs the support of 161 Senators, and can count on 137.

With the support of the life Senators, and defectors from the smaller parties (including M5S) it is likely to get to around 147-149. Letta therefore only needs around 12-14 PdL Senators to defect in order to survive. With the PdL split he is likely to get this.

More reaction to the reports that Berlusconi is considering throwing his support behind Enrico Letta in the confidence vote:

It would be a stunning u-turn from Silvio Berlusconi if, as reports suggest, he has now decided to back Enrico Letta in today’s vote of confidence.

But it wouldn’t exactly be out of character — and a number of political journalists and analysts were suggesting yesterday that this might happen, once we learned that his party were rebelling.

Remember, it was Berlusconi who triggered this crisis by threatening to bring the government down last week — by withdrawing his PdL party from the Letta coalition.

If he backs Letta today, then he could still trigger a crisis in future.

As Serena Ruffoni of the WSJ put it to me:

I don’t think the Letta government is any stronger even if it survives this confidence vote.

Senators are now speaking, with one tearing into Silvio Berlusconi — calling the former prime minister “‘a simple story of criminality”.

The BBC’s Gavin Hewitt reckons the gloves are off, as the battle for Italy’s future continues:

Enrico Letta concluded his speech by urging those in the chamber to give him their ”courage and confidence”. “A confidence that is not against anyone; a confidence that is for Italy” (quotes via Lizzy).

He also urged senators to search their consciences, and avoid a result that would leave them feeling “shameful regret”.

While Letta was speaking, Berlusconi could be seen holding discussion with some of his allies. I grabbed a picture:

Oh the drama….

There’s also a European theme to the speech — with Letta speaking of the need to dream of a “United States of Europe” one day. That fits with his tradition of being a solid Europhile (he was an MEP at one stage of his career)

Letta is outlining his vision for Italy — saying that growth and jobs must be the focus in 2014.

Apparently Berlusconi has told Italian media that he will listen to Letta’s speech and then decide whether to support him or not.

Enrico Letta’s speech is turning into a solid defense of his government’s record in the five months since he took over (colleague Lizzy Davies dubs it a “ very level-headed and systematic defense”.

But will that be enough to persuade PdL members to back him? As explained earlier — Letta would like to see 30 rebels jump the fence. He needs more than 20 (I think 24 is the magic number).

Letta also cited three priorities – support economic recovery; cutting taxes on workers, and increasing competition in Italy’s economy.

Letta is continuing to defend his government’s record on the economy — part of the strategy to persuade moderate members of the Berlusconi camp to back him.

It is on ordinary people suffering in economic crisis that our actions will have biggest effect, he said.

Berlusconi’s just arrived! He also looks weary, probably due to late night efforts to corall rebelling members of his PdL party into line.

No sign of Silvio Berlusconi at the start of Letta’s crunch speech. Angelino Alfano (deputy PM) is there, and there’s a consensus that he looks nervous.

(see 8.22am for a blurry snap of Dudu not being walked)

Looks like the confidence vote will come at midday — earlier than the previous indications.

And how many rebels will there be?

Lizzy Davies writes:

It’s all about the numbers today. Giovanardi claimed yesterday there were “more than 40″- believed to be as many as 44- PdL MPs prepared to vote for the confidence vote. But the Italian press reports that Berlusconi’s hawks told him the rebels were much- much- less numerous. Who’s right?

We’ll find out soon. Letta needs over 20 rebels. He’d be happier with more than 30.

Letta went on to warn that a new election could cause the same gridlock as last time:

Enrico Letta is urging parliament to give him a mandate for a “real and new” pact to tackle Italy’s problems.

(a reminder — Italy’s last election, in February, resulted in deadlock — with no party winning a majority in the Senate. Eventually a coalition was agreed between the centre-left PD and Berlusconi’s centre-right PdL, with Letta (a senior member of PD) as leader)

Here’s the key early quotes from Letta’s speech:

Update: the latest word from Italy is that we might get the confidence vote around midday, not this evening as I initially thought. 

Europe’s stock markets are all in the red today, with the FTSE 100 shedding 73 points. There’s nervousness about the situation in Italy, and also a knock-on effect from a bad day in Asia. The US Federal government shutdown isn’t exactly helping sentiment.

Overnight, the Nikkei tumbled 2% after the latest stimulus package from prime minister Abe failed to excite investors.

Wolf Piccoli, managing director at Teneo Intelligence, agrees that it could be a long day in the Rome parliament:

Analysts at Nordea Markets say it’s “fight night” in Italy, and possibly Berlusconi’s final bout.

In the red corner, we have PM Letta, who has probably worked hard – together with the President – to convince some of Berlusconi’s senators that new elections at this point is in no one’s interest.

A vote for a continuation of the current government and later on a vote for a budget and a new electoral law would make for a fresh start after spring elections. In the blue corner, we have Berlusconi. Media are full of stories about Berlusconi’s outstanding merits when it comes to winning tight political battles. But this time it seems that even members of his own party believes he has gone too far. Even Alfano – who has been seen as the crown prince in the PDL – said that he might vote for a continuation of the government.

Furthermore, it may be the old Champs last fight, if he is stripped of his senatorial seat on Friday. It will be a close call. Italy, and to a lesser extent Spain, will sell off if the government falls.

Jeremy Cook of World First agrees:

What might Letta tell parliament in his speech this morning?

Lizzy Davies explains that his speech is likely to focus on the socio-economic suffering of Italy, and tell deputies that they cannot just let its government fall.

His strategy will be to ram home the idea that the judicial woes of one man* have to be kept separate from the interests of the country – in an effort to split the doves in Berlusconi’s party from the hawks.

• – that man being Berlusconi himself, of course, who is on the brink of being expelled from the Senate after his tax fraud conviction.

In the comments section, regular reader mrwicket has outlined the potential scenarios from tonight’s vote.

As he flags up, we’re not 100% certain that a confidence vote will actually be called — Enrico Letta will probably judge the mood of the Senate first, and if he feels he can’t win then he might simply resign.

Lisa Jucca, Reuters chief financial correspondent in Italy, agrees that this could be the moment that Angelino Alfano, Berlusconi’s right-hand man for so long, finally rises up: