The New York Times today: Berlusconi and Gaddafi – "a Godfather moment"

But Italy — which gets nearly a quarter of its crude oil and 10 percent of its natural gas from Libya, has billions of dollars in lucrative contracts with the Libyan government and receives billions more in Libyan investments — has held back on freezing any assets. Officials say they are waiting for a “coordinated” response from the European Union about whether the measure applies to Libyan sovereign funds, a ruling that Italy said it hoped would come as soon as next week.

With Libya in turmoil and Colonel Qaddafi clinging to power, no country has more at stake than Italy, which finds itself in its most complicated diplomatic position in decades, pulled between its commitment to NATO and human rights and its scramble to protect its investments in a country that has once again become a pariah.

“France has Tunisia; Spain, Morocco; and Italy, Libya,” said Emma Bonino, a member of the opposition Democratic Party, who sits on the Italian Senate’s Foreign Affairs Committee. She opposed a bilateral treaty between Italy and Libya in 2008.

Since 2004, when the United Nations lifted a trade embargo that was imposed after Libya’s 1986 bombing of a German disco, Italy has been the European Union’s top arms exporter to Libya, according to union data. Its politically influential energy company, Eni, has tens of billions of dollars invested in Libya. Italy is also Libya’s largest trading partner, and Italian companies are building a coastal highway and have contracts in construction, railways and fiber optics.

Losing that would take “an enormous economic toll,” said Andrea Nativi, the editor in chief of Rivista Italiana Difesa, Italy’s leading defense publication.

The ties go both ways. Libya, through the Libyan Investment Authority and the Libyan Central Bank, has a 7.6 percent stake in the Italian bank UniCredit, and the central bank’s governor, Farhat Bengdara, sits on UniCredit’s board.

Libyan investors also have a 2 percent stake in the Italian aerospace and defense company Finmeccanica, a less than 2 percent stake in Fiat, a stake in an offshoot of Telecom Italia and 7.5 percent of the Turin soccer club Juventus.

Libya’s Banca UBAE, which handles the country’s oil and gas transactions in Europe, has its headquarters in Rome.

Those ties may help explain why Prime Minister Silvio Berlusconi has been slow to condemn Colonel Qaddafi’s bloody crackdown. When the conflict started last month, Mr. Berlusconi said he did not want to “bother” the colonel. It was only after several days that he denounced the violence. By last weekend, he said Italy no longer considered Colonel Qaddafi in control of Libya.

More significantly, last week Italy announced that it had effectively suspended its 2008 “Friendship Treaty” with Libya, which Mr. Berlusconi had touted as his greatest foreign policy achievement, since Libya was in chaos.

“Italy is astonished because the accord was supposed to save it, but whom does it talk to now?” said Sergio Romano, a political columnist and former ambassador. “It cannot totally disavow Qaddafi, but it can’t sustain him because he’s become unpresentable.”

In the accord, which was negotiated by several Italian governments and passed with wide bipartisan support, Italy pledged Libya $5 billion over 20 years to amend for its colonial past there. In exchange, Libya gave Italy favorable treatment in lucrative energy, infrastructure and defense contracts. It also pledged to stem the flow of illegal immigrants from its shores — a key domestic issue in Italy — using means questioned by human rights groups.

But the treaty also had an unusual nonaggression clause, in which Italy pledged not to use its territory for hostile acts against Libya — a clause requested by Libya, said Senator Lamberto Dini, a former Italian prime minister who helped negotiate the treaty and is now the chairman of the Italian Senate’s Foreign Affairs Committee.

Analysts interpreted the treaty’s suspension as a signal by Italy that it would make its bases available in the event of military intervention. There are several United States and NATO bases in Italy, and the United States Sixth Fleet is based near Naples. Rome has said it will approve a no-flight zone only with the backing of NATO and the United Nations.

The countries’ uneasy embrace goes back a century, beginning with Italy’s colonial occupation of Libya in 1911 and continuing through the establishment of a monarchy in 1951 and Colonel Qaddafi’s anticolonial dictatorship in 1969.

When Mr. Berlusconi briskly kissed the colonel’s hand on a visit to Libya last March, the Godfather moment revealed more than the personal bond between two of the world’s most colorful leaders. It reflected decades of close ties.

In 1986, Prime Minister Bettino Craxi saved Colonel Qaddafi’s life by warning him that the United States was about to bomb Tripoli in retaliation for the German disco bombing, Mr. Craxi’s son, Bobo Craxi, said in an interview.

Perhaps the leading player in Italy’s Libya policy is Eni, the Italian energy utility, which has been operating in Libya since 1959 and is widely perceived as the second pillar of Italian foreign policy after NATO, especially after Italy gave up nuclear power in the early 1980s.

Over the years, Eni “never flaunted its power, but it exercised it,” said Mr. Romano, the former ambassador. Among diplomats, the company’s chief executive is widely considered to be at least as influential as any cabinet member.

Libya is Eni’s largest source of oil and gas and is home to one-fifth of the company’s developed oil fields. After the 2008 accord, Eni pledged to invest $28 billion in Libya to extend its oil and gas contracts into 2040 and develop new fields. The company said last week that Libya owned less than 2 percent of the company.

Since the unrest, Eni has roughly halved it operations in Libya. Last month it evacuated almost all of its personnel and shut down its Greenstream pipeline, which runs from Libya to Sicily and carries 10 percent of Italy’s natural gas supply.

“Of the companies that are exposed in Libya, Eni on a volume basis has the most at risk,” said Claudia Pessagno, an equity analyst with IHS Herald, which monitors the petroleum market.

A spokesman for Eni declined to comment.

While Mr. Berlusconi has condemned Colonel Qaddafi, he does not seem to have had a perceptible impact on his erstwhile friend.

In the view of Mr. Dini, Mr. Berlusconi’s sway over Colonel Qaddafi is “not necessarily very much.” He said he hoped the bilateral treaty could be reactivated in “a new Libya,” one without Colonel Qaddafi.