By Danilo Masoni and Stephen Jewkes
MILAN/BOLOGNA (Reuters) - Italy is again flirting with economic disaster, Prime Minister Mario Monti said, as crowds massed in sporadically violent protest at his austerity programme a day ahead of an election in Greece that threatens to destabilize the whole euro zone.
"We stepped away from the precipice before, but the hole is growing bigger and it may swallow us up. We are again in a crisis," Monti said on Saturday at a ribbon-cutting ceremony near Milan.
Monti replaced discredited former prime minister Silvio Berlusconi in November as the recession-mired country teetered on the edge of a Greek-style default, passing a tough austerity package to try to restore investor confidence.
The measures, including 24 billion euros in new taxes for this year alone, pushed down Rome's borrowing costs for a time. But a banking bailout in Spain and prospects of Greece ditching the euro have seen the benchmark 10-year Italian bond yield peak above 6 percent again in recent days.
Yields pushing through 7 percent triggered international bailouts for Greece, Portugal and Ireland.
Speaking later in the day in Bologna, Monti said he and other European leaders expected the Greeks to favor parties that want to keep the euro, honoring the terms of the country's bailout.
"I expect, and I have the impression that many European governments expect, a vote that is favorable to maintaining a solid relationship between Greece and the rest of Europe, favorable to Greece staying in the euro zone, favorable to the parties that want to stay in," Monti said.
Anti-government protesters clashed with police outside the theatre where Monti was speaking, hours after a huge but peaceful march brought the centre of Rome to a standstill.
Monti's approval rating has slumped to 33 percent from 71 percent when he took office, pollsters SWG said on Friday, a symptom of the austerity coupled with a labor market reforms that unions consider a threat to full-time workers.
JOBS, NOT CUTS
His policies have been a focus of repeated criticism from the country's three biggest unions.
They harangued the government on Saturday in speeches in a packed People's Square in Rome, where organizers said that 200,000 turned out for the march through the city centre.
The protesters chanted, waved red and green-and-white striped flags, and blew whistles on a bright, hot morning in the capital.
"We are here because the government's programme ... is causing the recession to deepen in our country," Susanna Camusso, leader of Italy's biggest labor union, told Reuters television.
She and other labor leaders urged the government not to cut the welfare system to reduce the budget deficit, and to focus instead on creating new jobs as unemployment climbs above 10 percent.
"The elections in Greece are obviously a major concern, but we need to remember that if Greece is in trouble it is because Europe from the start did not choose social policies as a way out of the crisis," she said.
The Rome march passed off without incident, but in Bologna protesters came to blows with riot police when they tried to break through a police cordon outside the theatre where the prime minister was speaking.
After being pushed back, a few hundred protesters continued to throw eggs, tomatoes, firecrackers, glass bottles, flares and even frying pans at the police.
Ten police including two commanders were slightly injured, police headquarters in the city said.
Inside the theatre the mood was very different, with Monti speaking somberly about the political challenges he faces.
He urged the right-left coalition that supports his unelected government to pass the labor reform - presented three months ago and still awaiting parliamentary approval - before EU leaders meet, in order to reinforce Italy's credibility
In both Bologna and Milan he said finding ways to promote economic growth must be a priority for a June 28-29 European Union summit in Brussels.
Seeking to counter the increasing popular disenchantment and stem rising political tensions, Monti on Friday passed what he dubbed a "growth decree" to put more emphasis on jump-starting the economy, which has been shrinking since the middle of last year.
Monti said the impact of the decree would take time to filter through. Taking measures to stimulate growth was "a long and difficult path. We will see some effects soon, but they cannot be measured in the next month or quarter."
(Additional reporting by Manlio Scimeca in Bologna and Hanna Rantala in Rome. Writing by Steve Scherer.; Editing by John Stonestreet)