By Giuseppe Fonte and Stefano Bernabei
ROME (Reuters) - Italy is working on improving the reform of the euro zone bailout fund and is not considering vetoing it at the moment, a government official said, as politicians in the euro zone's third-largest economy quarreled over the proposed changes.
A draft reform of the fund, known as the European Stability Mechanism (ESM), was agreed on by all euro zone finance ministers in June and is due to be finalised by leaders next month.
But Italy's main opposition party, the right-wing League, says the reform is a betrayal of Italian sovereignty, while senior Italian officials including the head of the central bank have said some aspects of it could prove financially dangerous.
Prime Minister Giuseppe Conte said on Tuesday that Italy would only approve the reform if it was part of a broad package of reforms, and Italian media have written that the government might seek to delay and eventually veto it.
"We're working on improving the accord, that's what we're doing at the moment. I wouldn't raise the question of a veto," a government official told Reuters on Wednesday, asking not to be named.
The main source of concern is proposals that would make it easier to restructure euro zone sovereign bonds in the event of a financial crisis.
The issue of debt restructuring is particularly sensitive in Italy. Its public debt, at 135% of gross domestic product, is proportionally the highest in the euro zone after Greece's, and its sustainability is often questioned at times of rising bond yields.
The Bank of Italy, whose governor Ignazio Visco warned last week that any debt restructuring mechanism could hit market confidence in Italy's debt, said on Wednesday that Visco was not against ESM reform in itself.
Instead he is concerned about the future workings of the ESM if the reform is not part of a broader reform of euro zone economic governance, a Bank of Italy source said.
European Commission Vice President Valdis Dombrovskis said in Brussels that the reform as it stands is a "balanced package" and the Commission still hopes euro zone leaders will sign off on a final agreement over it next month as scheduled.
However, critics in Italy voiced more concerns on Wednesday even as Economy Minister Roberto Gualtieri, who has always backed the reform, reiterated that it was no threat to Italy's interests.
Gualtieri said in a statement that the debate over the reform had generated "great confusion" and dismissed as "senseless" critics' suggestion Italy would automatically have to restructure its debt if it ever wanted ESM assistance.
Earlier on Wednesday, Foreign Minister Luigi Di Maio from the anti-establishment 5-Star Movement said the reform may be unacceptable. "We need to take stock. An ESM reform that crushes Italy is not feasible," he told newspaper Corriere della Sera.
He added that he wanted a meeting of the ruling coalition to discuss how to proceed.
Italy's banking lobby ABI also joined the debate. Its president Antonio Patuelli told reporters that if the ESM reform worsened market conditions the lenders "will buy fewer Italian sovereign bonds" - something the government wants to avoid.
At the end of September, Italian lenders held around a sixth of the national debt - some 400 billion euros ($440 billion).
(additional reporting by Francesco Guarascio and Francesca Piscioneri, writing by Gavin Jones; Editing by David Goodman and Hugh Lawson)