* Monti says has partial union backing for reform
* Minister says reform will affect existing contracts too
* Left-wing CGIL objects, Monti says no more talking
* CGIL vows to fight reforms with all it has
By Gavin Jones and Daniele Mari
ROME, March 21 (Reuters) - Italian Prime Minister Mario Monti set a collision course with the country's biggest trade union after talks on a historic reform to employment protection law failed to produce a deal.
The left-wing CGIL union, which has six million members, will meet on Wednesday to decide how to protest against a reform which its leader called an attack on workers and an attempt to solve Italy's labour problems by "easy firing".
The reform plan outlined by Labour Minister Elsa Fornero after a three hour meeting with unions and employers on Tuesday went further than expected by weakening protections against dismissal provided not only in new employment contracts, as planned, but also for millions of people already in jobs.
Monti said the reform had the broad support of employers and the more moderate CISL and UIL unions, and he was no longer willing to negotiate over firing with the CGIL.
"This reform will make the system more modern and we will be able to say that, as far as the labour market is concerned there are no longer hindrances to foreign investment in Italy," he said at a news conference.
He admitted he was "worried" by the refusal of the CGIL to support a reform which investors say is a touchstone for how far the technocratic premier can shake up an Italian economy that he was brought in to rescue from a downward spiral of public indebtedness, low productivity and low employment.
The key reform to Article 18 of the labour code, a talisman for the unions of achievements they secured from bosses 40 years ago, would be presented to parliament, Monti said, after some minor fine-tuning during the rest of this week.
The parliamentary process will represent another challenge for Monti. The centre-left Democrat party, one of the main groupings on which he depends for his majority, has strong ties with the CGIL and risks a split between its more centrist and leftist wings.
Due to the protection offered by Article 18 big employers complain it is virtually impossible to get rid of staff who fail to perform, discouraging them from taking on new workers and damaging productivity.
One result has been the creation of a two-tier labour market, where established employees in companies with more than 15 workers are protected for life by powerful contracts and younger Italians and those in small firms are condemned to spend years either out of work or on precarious temporary contracts.
CGIL chief Susanna Camusso accused Monti's technocratic administration of bad faith and not having been serious in the negotiations.
"We will mobilise, we will do everything necessary to counter this reform," she said, adding that Monti was "trying to solve the many problems of the labour market with the idea of easy firing".
That is almost certain to mean strikes and mass demonstrations of a kind Monti has so far been spared as he has ridden a wave of concern about economic crisis which has muted protests against change.
Startling for some, however, will be Fornero's announcement that the changes to Article 18, widening the grounds which employers in larger companies may use to dismiss staff, would affect not only, as expected, people joining firms for the first time but also those who have existing employment contracts.
That could stir deeper opposition among millions of Italians who have grown ever more concerned for the future of their jobs.
While the reforms do not go as far as some labour experts had urged, their successful implementation is still likely to bolster confidence in Monti's ability to push through the kind of far-reaching changes that are needed to restore growth and reduce Italy's crippling burden of public debt.
Appointed in November as financial market turmoil threatened to suck Italy into a Greek-style debt crisis, Monti has already moved to shore up public finances through a mix of spending cuts, tax hikes and an overhaul of the pension system.
The labour reform discussions are being watched closely by financial markets, which have been reassured by Monti's first months in government, but remain nervous about growth prospects in the troubled euro zone.
More than 30 percent of 18- to 24-year olds in Italy are unemployed, and only about 57 percent of Italians have a job, giving the country one of the lowest employment rates in the euro zone.
It also has some of the slowest growths on the continent. Monti must revive the economy if he is to convince markets that Italy can pay off its huge debt, amounting to around 120 percent of gross domestic product.
Italy's benchmark bond yield has fallen to below 5 percent from perilous highs of close to 8 percent near the end of last year. But investors may start changing their view if Monti fails to pull off the labour reforms he has promised.