By Giuseppe Fonte and Gavin Jones
ROME (Reuters) - Italian coalition feuding intensified on Tuesday, with the ruling parties at loggerheads over a junior minister embroiled in a corruption scandal as markets began pricing in a possible government collapse.
The leaders of the right-wing League and the anti-establishment 5-Star Movement both said they wanted the alliance to continue, but showed no willingness to compromise over the future of the League official at the centre of the graft probe.
Armando Siri, a transport ministry undersecretary and economic adviser to League chief Matteo Salvini, was put under investigation on Thursday for allegedly accepting bribes to promote the interests of renewable energy firms.
Siri's boss, Transport Minister Danilo Toninelli, who is from 5-Star, stripped him of his responsibilities, prompting an angry reaction from the League.
Long-running bickering between the two parties has intensified ahead of European Parliament elections in May, where they are competing against each other.
"You are guilty when you're sentenced by a judge, not when you end up in the newspapers," Salvini told reporters on Tuesday ahead of an evening cabinet meeting, adding that Siri should "absolutely not" resign.
That approach is anathema to 5-Star, which bases its support on a squeaky-clean image and a hard line against corruption.
"Nobody is opening a government crisis, but I cannot accept that that undersecretary remains in office," 5-Star leader Luigi Di Maio said in a television interview shortly after Salvini's comments.
Italy's benchmark 10-year government bond yield jumped to its highest in seven weeks, pushed up by unease over the infighting and an upcoming ratings review.
As ministers arrived at the prime minister's office it appeared that 5-Star planned to boycott the meeting, which was called to approve a long-delayed package of measures to boost Italy's sluggish economy.
The gathering began with just three of the party's nine ministers present and without Di Maio, who was pre-recording his TV interview. However, he later joined the meeting and denied his party had thought of staying away in protest.
The row over the corruption probe deflected attention from the so-called "growth decree" intended to help lift the economy out of a shallow recession it fell into at the end of last year.
The package focuses mainly on companies, increasing tax breaks on investments in machinery, cutting property taxes on factories and warehouses and simplifying procedures for public tenders.
The government was due to sign off on the decree almost three weeks ago, but delayed its approval due to disagreements over the details of the measures.
Its approval was thrown into doubt again over the weekend when Salvini threatened to withdraw the League's backing because it includes a measure to reduce the debt of Rome's municipal government, which is run by 5-Star.
Salvini said the re-negotiation of Rome's debt would be discussed separately, but only so long as financial aid was also made available to other municipalities in difficulty, which are run by the League.
At 11 p.m. local time (2100 GMT), the meeting was still ongoing.
(additional reporting by Francesca Piscioneri and Angelo Amante; editing by Catherine Evans and Howard Goller)