By Crispian Balmer
ROME (Reuters) - Matteo Renzi is struggling to regain the political initiative after a disastrous spell during which he lost his job as prime minister and his party fractured.
His approval ratings are in slow decline, his attempts to reassert control over the ruling Democratic Party (PD) are flailing and his efforts to control the coalition government from outside parliament have foundered.
Unless he manages to revive his fortunes quickly, he will surely lose national elections expected in early 2018, and possibly open the door for groups that are hostile to the single euro currency and likely to spook financial markets.
Italy has the highest outstanding sovereign debt in the European Union and investors fear a populist-led government in Rome could yet lead to the break up of the euro zone.
"Renzi keeps on saying that everything is going well, but it clearly isn't," said parliamentarian Giuseppe Civati, a one-time friend of the center-left leader who walked out of the PD two years ago in disaccord over policy priorities.
"He seems disconnected from reality. He is getting into fights with everyone and turning people off," he told Reuters.
Civati was one of many people criticized in Renzi's new book called "Avanti" (Forward), which was published this month and was meant to focus on future plans, but instead set off fierce rows over his reading of recent history.
While rallying to Renzi's side, party chiefs are exasperated by constant public feuding as they fear it is exasperating voters worn down by years of economic underperformance, stagnant wages, high unemployment and falling living standards.
"Something isn't working and we have six months to sort it out. All these controversies will be reduced to zero. We will adopt an institutional, upright attitude," said lawmaker Matteo Richetti, who is head of communications for the PD.
One PD source, who declined to be named, said that to help calm frayed tempers, the 42-year-old Renzi would adopt a very low profile in August and only return to television screens in the middle of September.
The general election must be held by May, with February or March seen as the most likely. An electoral milestone will come in November, however, via a ballot in Sicily which could see the anti-system 5-Star Movement chalk up its first regional victory.
"This vote will have a major impact and set the tone for the subsequent general election," Richetti said.
Unfortunately for Renzi, Sicily, blighted by a jobless rate of some 22 percent, has little love for him. More than 70 percent of islanders voted against him in a December referendum, his worst showing in the country besides Sardinia.
The PD won more than 40 percent of the vote across Italy in European elections in 2014 shortly after Renzi took office in an internal party coup, but it has been downhill ever since.
He was forced to resign as prime minister in December after losing the referendum on his plans to streamline parliament. Two months later, a group of senior PD members broke away, saying the party had shifted too far to the center.
Although Renzi comfortably won a party leadership contest in May, the PD fared badly in June's local elections, and a poll on Sunday for Corriere della Sera newspaper put the PD on 26.9 percent, behind 5-Star on 27.6 percent.
The survey also showed a trio of loosely allied rightist parties, including Silvio Berlusconi's Forza Italia, taking some 35 percent of the combined vote.
None of these scores would be enough to let any group govern alone under the terms of a new electoral law, which Renzi has tried but failed to change. The system restores proportional representation (PR) to Italy and looks certain to produce highly fragmented legislatures in both the upper and lower chambers.
This means the PD could still be at the heart of the next government even if it comes second at the ballot box, but this will depend on Renzi's ability to forge coalition alliances.
The return to PR will give smaller parties greater negotiating power, which helps to explain the schisms and fomentation rattling Italian politics.
"This electoral law is to blame for a lot of the agitation we are seeing," European Affairs Minister Sandro Gozi told Reuters. "People are looking where best to position themselves for votes and that is causing tensions."
The breakaway PD dissidents see gains to be made following the path of Britain's Jeremy Corbyn, a diehard socialist who galvanized the youth vote in Britain's June election.
Renzi is drawn instead to the recipe that helped centrist Emmanuel Macron win this year's French presidential election.
"Don't forget, Corbyn lost. He is a nice guy, but he lost. This is not the model we want to follow," said Gozi, a close Renzi supporter. "Macron's success shows you can bring together different ideas and win ... this is what Renzi wants."
The PD plans to crisscross Italy in a train in September to reconnect with the electorate and in October the party will hold a convention to decide the outlines of its campaign manifesto.
The party hopes signs the economy is finally picking up, with the Bank of Italy predicting growth of 1.4 percent this year, its strongest reading since 2007, will boost its chances.
Renzi's opponents are likely to try to keep his abrasive personality to the fore, seeing it as a vote winner for them.
"Personal relations are vital in Italian politics and he has up ended isolated, even within his own PD. When he needs help, he will realize there isn't much out there for him," said his old companion Civati.
Portrayed in the media as the "demolition man", Renzi has a reputation for ruthlessly dismissing people he no longer views as useful - most recently the PD's centrist ally, Foreign Minister Angelino Alfano, whose efforts to find a compromise on the electoral law he blithely squashed.
Renzi brushes off suggestions that his swagger and self-confidence don't chime with the national mood, hopeful that policies not personalities will dominate the coming campaign.
"We have to change Italy, not my character," he told RTL radio this month.
(Reporting by Crispian Balmer; editing by David Clarke)