ROME (Reuters) - Italy's caretaker government said it was delaying approval of a decree to pay back some 40 billion euros (33.6 billion pounds) of state debts to private firms, adding to the confusion already created by February's deadlocked election.
The legislation, which Mario Monti's outgoing administration says can provide vital liquidity to cash-strapped companies and help tackle a deep recession, was scheduled to be approved at a cabinet meeting on Wednesday evening.
But a statement said the meeting would be held "in the next few days" after Economy Minister Vittorio Grilli and Industry Minister Corrado Passera "pointed out to the prime minister the need to reflect further before drawing up the decree."
The about-turn underlines the uncertainty created by the election, which has left Italy facing weeks in political limbo with no party able to form a government while economic problems continue to pile up.
Monti, the former European Commissioner appointed in 2011 after the fall of Silvio Berlusconi's centre-right government, remains in office until a new government can be appointed.
The massive backlog of unpaid bills owed by Italy's public administration has been a longstanding source of complaint by companies which have struggled to raise credit from banks facing increasingly tight credit conditions themselves.
The government says settling the bills will provide a sorely needed cash injection for an economy now stuck in its longest recession for 20 years.
But it has proved difficult to find the money to pay the companies, most in the healthcare and construction sectors, which have total accumulated claims estimated by the Bank of Italy at some 90 billion euros at the end of 2011.
According to sources close to the negotiations, Grilli had originally envisaged an increase in income tax before the idea was rejected by political parties.
He said in a television interview due to air on Rai 1 on Wednesday that the decree would not include any tax increases, and that it had only been delayed by a few days.
He expected the first payments would be made to companies by mid-May.
Monti spent almost an hour on Wednesday outlining the planned legislation to European Monetary Affairs Commissioner Olli Rehn and assured him Italy would respect the EU's deficit limit of 3 percent of gross domestic product this year.
But there was no sign he had managed to persuade Brussels to allow Italy to exempt the funds used to settle the bills from its deficit calculations, which could have given it some much-needed breathing space.
"LIFE OR DEATH"
Italy's long-running recession and the 2-trillion-euro public debt have severely limited the scope for any extra payouts, with edgy financial markets ready to punish signs of slackening on commitments to shore up public finances.
But with 15,000 firms put out of business since 2008 because of unpaid bills, according to skilled trades association CGIA Mestre, the cost of the late payments has hit prospects of economic recovery.
"For some companies the issues of the unpaid bills is a question of life or death," said Maurizio Carbellese, owner of Puglia-based medical devices reseller Abasan, which since 2010 has accumulated credits worth 2 million euros with local health authorities.
The government last month raised its deficit forecast for this year from 1.8 percent of GDP to 2.9 percent, just within the EU limits, of which 0.5 percentage point is due to the 20 billion set aside this year for settling the late payments.
The cabinet statement gave no further details although Graziano Delrio, head of local government association ANCI, said after a meeting with ministers that approval would come by Monday at the latest.
Monti, who has been the target of constant sniping from across the political spectrum since his centrist alliance won only around 10 percent of the vote at February's election, faced more criticism after the delay to the decree.
Stefano Fassina, economics spokesman for the centre-left Democratic party said Monti must explain his "disconcerting" decision in parliament, while Luigi Casero of the centre-right People of Freedom, called it "extremely grave."
Monti told parliament last month that he "couldn't wait" to leave office, but the deadlock following the election has prevented him from stepping down because no other government can be formed to replace him.
Italy's parliament is due to begin voting on April 18 to select a new president to replace Giorgio Napolitano, whose seven-year term ends in mid-May. Napolitano has struggled to break the deadlock, making it likely the next president will inherit the impasse.