Silvio Berlusconi is under pressure to take action

Prime Minister Silvio Berlusconi has been under pressure to reform the Bank of Italy and reduce the powers of its governor Antonio Fazio.

Mr Fazio has been accused of favouring a domestic bank over a foreign rival in their pursuit of Banca Antonveneta.

Now the government plans to limit future governor's term to seven years.

Controversial figure

But it says that the limits - which will need Parliamentary approval - will not apply to Mr Fazio.

"Fazio will do as he wishes, but I don't see any need for him to resign," said Labour Minister Roberto Maroni, a member of the Northern League coalition party that has proved Fazio's most fervent supporter.

The Bank of Italy has been criticised for its handling of Banca Popolare Italiana's bid for its rival Antonveneta.

The bid - which was up against a rival offer from Dutch bank ABN Amro - was approved by Mr Fazio after he overruled a number of senior regulators who expressed concerns about its viability.

Antonio Fazio has become a divisive figure in Italian politics

Details of wiretapped conversations leaked to the press revealed that Mr Fazio had given the boss of Popolare Italiana advance notice of the decision, leading critics to question his impartiality.

Popolare Italiana's bid was subsequently suspended, while its two most senior executives have temporarily stood down pending a judicial inquiry into alleged illegal dealing in Antonveneta shares.

Silvio Berlusconi has backed Mr Fazio and said he did nothing wrong.

Reduced powers?

Now the Italian cabinet reached agreement to introduce legislation that would limit future governors terms of office to seven years, more in line with Europe's other central banks.

The Bank's regulatory procedures are also likely to come be amended with critics keen to ensure that key decisions are taken by committee and not left to a single individual.

But the government has rejected calls to remove its regulatory powers completely.

The Berlusconi government has also promised to overhaul the Bank's ownership structure.