WASHINGTON, Oct 6 (Reuters) - Italy has used up the budget leeway provided by European Union rules, European Commission Vice President Valdis Dombrovskis said on Thursday, in what could herald trouble for an EU assessment of Rome's plans of a higher budget deficit in 2017.
In late September Italy cut its economic growth forecasts and sharply hiked its target for the 2017 budget deficit for the second time in five months, setting up a potential clash with the Commission, the guardian of EU budget rules.
The forecasts will set the framework for the 2017 budget and Prime Minister Matteo Renzi is anxious to avoid unpopular belt-tightening measures ahead of a December referendum on constitutional reform that could decide his political future.
The European Commission has urged Rome not to ease up on previously agreed fiscal targets, but the euro zone's third largest economy has slowed and posted no growth in the second quarter, upsetting previous public finance assumptions.
"Italy has used up pretty much all the flexibility that was there in the structural reform and investment clauses (of EU budget rules)," Dombrovskis told a seminar in the Peterson Institute for International Economics.
Italy has until Oct 15 to submit its main budget assumptions for 2017 to the Commission for scrutiny.
If the assumptions go against EU rules, which call for all euro zone governments to strive towards budget balance and debt reduction, the Commission could send back the draft Italian budget for changes. (Reporting By Jan Strupczewski; Editing by Chizu Nomiyama)