The measures, part of the government's proposed package of spending and taxes for 2008, were debated at a Cabinet meeting that stretched over about 12 hours, beginning late Friday afternoon and ending early Saturday.

Prodi's center-left coalition has been struggling to stay intact virtually since it began governing in May 2006, and some of his allies have been predicting that if his coalition unravels, early elections, eagerly sought by conservative opposition leader Silvio Berlusconi, would be the consequence.

The government's popularity has been sagging in opinion polls, and Berlusconi, the media mogul and former premier who Prodi defeated in 2006 elections, has been pressing for a return to the ballot box.

Prodi's description of the proposed national budget for next year sounded both like a pep talk to keep his coalition partners enthusiastic and a campaign rally in case elections are near.

"We are proud of this outcome of team play which will help families, businesses and citizens and the weakest members" of society, Prodi told a news conference at the premier's office.

The premier boasted that the overall euro11 billion (US$15.6 billion) budget was nearly one-third less than the current year's budget.

The budget must be passed by Parliament by the end of 2007, and if past years are any guide, many of the measures approved by the Cabinet could be revised several times before becoming law.

With his often rebellious, far-left coalition partners, including Communists, balking over Prodi's aim to reform Italy's generous pension system, the Cabinet decided to put off a decision on that thorny issue until Oct. 12.

The far-left had gone into the Cabinet session threatening not to approve the budget unless welfare spending took priority over tax cuts.

Prodi told the news conference that reforms to the pension system and hiring rules would be approved at the Oct. 12 session.

Economy Minister Tommaso Padoa-Schioppa said Italy's economic growth rate was declining, "but the drop is not dramatic."

He also sounded an optimistic note, saying that mortgage crises that have hit financial institutions and consumers hard in the United States, does not seem to be hitting Italy.

The government "is keeping all its promises" and "we are operating in a context of healing" Italy's finances, Padoa-Schioppa said.

Far-left parties already have forced Prodi to briefly resign over Italy's military mission in Afghanistan, and their opposition to economic reforms has stifled or watered down attempts to liberalize the country's economy and reduce public spending.