April 28 (Bloomberg) -- Fiat SpA workers striking at a plant in southern Italy and a walkout at Alitalia SpA may derail a recovery in Europe's fourth-biggest economy.

Production stalled at Fiat, Italy's biggest manufacturer, after 10 days of strikes by workers demanding more pay and shorter shifts at its car parts factory in the southern town of Melfi. Alitalia canceled four flights after unions started a nationwide protest against plans to cut more than 3,000 jobs at the national carrier, which is losing 1.2 million euros ($1.4 million) a day.

Labor unrest in Italy has hurt manufacturing and contributed to the slump in consumer demand that prompted growth in Italy's $1.5 trillion economy to stall in the fourth quarter. Both the International Monetary Fund and the European Commission predict Italy will grow this year at the slowest pace among the Group of Seven industrial nations.

``The strikes are hitting at a moment when Italy is particularly vulnerable because industrial production is already at a delicate point,'' Pasquale Diana, an economist with J.P. Morgan Chase & Co. in London, said. ``The strikes are making the rebound really questionable.''

Industrial production in March probably fell 0.5 percent, Confindustria, Italy's largest employers' lobby predicted. Manufacturing was hurt by a general strike by the country's three largest unions against the economic policies of Prime Minister Silvio Berlusconi's government. The statistics institute publishes its report on March production on May 13.

Job Concerns

Consumer confidence fell in April for a third month in four and is close to a 10-year low. The jobless rate is 8.5 percent.

``People are more concerned about their jobs, which is why they are restraining themselves from consuming,'' said Susana Garcia-Cervero, an economist at Deutsche Bank AG in London, who said she may cut her forecast for Italian economic growth this year to as little as 0.8 percent from 1.2 percent. ``Strikes certainly don't help.''

The government may decide on a 1.2 billion-euro aid package to keep the state-owned airline flying tomorrow. Those measures may hurt efforts to contain the budget deficit.

The European Commission today said Italy, Europe's most indebted country, needs to cut spending or raise taxes by 0.5 percent of gross domestic product, or 7 billion euros, to avoid breaching the EU deficit ceiling of 3 percent of GDP this year and make similar savings in future years. Berlusconi is instead planning to cut income taxes next year.

Election Test

The labor unrest comes as Berlusconi campaigns for European parliamentary and local Italian elections in June that will be the biggest test of his support since his election in 2001.

The Alitalia strike may affect customers of other carriers. The airline, which controls about half of the Italian market, provides handling and other support services to competing airlines. Alitalia workers have blocked some check-in counters at several airports, disrupting flights. About 600 workers marched through Rome's Fiumicino airport, blocking the arrivals area and trying to prevent flight crews from boarding their aircraft, news agency Ansa reported.

Alitalia unions have called for a 12-hour strike tomorrow, Roberto Panella, national secretary of the UGL union, said in an interview. Today's strike will end at 6 p.m. Milan time, he said.

Extra police and security forces were in place to try to stop workers from occupying runways, Ansa said.

Alitalia's nine unions are protesting against Chief Executive Marco Zanichelli's two-year plan, which entails the carrier selling businesses and eliminating 3,300 jobs. A meeting between the company and unions last night was adjourned until Friday and the airline's board put off a decision on the cost-cutting plan until May 3.

Unauthorized

Implementing the cost-cutting plan is key to the survival of the world's seventh-biggest airline by revenue, which employs 20,700 workers. Italy's flagship carrier, which posted a loss before tax and extraordinary items of 500 million euros last year, also needs to return to profit after posting to be able to join Air France SA's merger with KLM Royal Dutch Airlines.

Under Italian law, strikes should be authorized by a national commission. Alitalia's unions haven't sought the commission's clearance for the walkout and last week threatened ``unprecedented'' action, including blockades of airports and highways.

Alitalia shares have fallen about 11 percent this year, the second-worst performer on the eight-member Bloomberg Europe Airlines Index, which has gained 1 percent. Fiat shares have fallen 1.4 percent this year, compared with the 5 percent advance in the Bloomberg Europe Autos Index.

Alitalia shares fell as much as 2.5 percent and were down 1.7 percent to 23.7 euros at 4:33 p.m. in Milan. Fiat shed 7.7 cents, or 1.3 percent, to 5.97 euros after falling as much as 1.4 percent. Italy's benchmark Mib30 stock index fell 0.3 percent.

Fiat Blockade

At Fiat, the strike at the Melfi components factory has cut production by about 26,000 cars. All six of the company's Italian plants are shut because of strikes. Fiat builds about 4,500 cars a day in Italy, about half its worldwide production.

Fiat and union officials will meet tonight at 9 p.m. in Rome to resume talks over conditions at the Melfi plant. The strike is stalling production of the Fiat Punto, Lancia Ypsilon and Alfa Romeo 156, three of the 11 new or revamped models introduced in the last six months to boost sales and break even this year, after losses since the fourth quarter of 2001.

Workers have been blockading the entrance to the Melfi plant, keeping non-striking workers from starting production. Unions said 15,000 people were participating in demonstrations there today.

Melfi's 5,000 workers are protesting work shifts as long as 12 consecutive days and lower salaries compared with other Fiat workers. Some 3,000 workers at 22 Fiat suppliers located near the Melfi factory also are on strike.

To contact the reporters on this story: Sheyam Ghieth in Rome at sghieth@bloomberg.net Andrew Davis in Rome at abdavis@andrewbdavis.net

Last Updated: April 28, 2004 10:40 EDT