Italian prime minister Silvio Berlusconi has been dealt a serious blow after Italian president Carlo Azeglio Ciampi unexpectedly refused to sign his government's controversial new media law.

The Gasparri law had already been approved this month by both the Italian Parliament and the Italian Senate, where Berlusconi's centre-right coalition has a comfortable majority.

To become law, the bill only needed president Ciampi's seal of approval, which was widely expected to be a matter of formality.

However, over the past couple of weeks, critics of the Gasparri law had been putting increasing pressure on Ciampi to reject the bill, which was widely seen as tailor-made to suit Berlusconi's business interests.

Ciampi has now sent the bill back to Parliament, saying that it fails to "guarantee the plurality in the media and could lead to the formation of dominant positions, especially in the area of advertising."

It is the first time Ciampi has refused to sign a bill into law for anything other than budgetary reasons.

The new law, which paves the way for digital TV transmission, would let companies control a bigger slice of the advertising market. As such, it could allow Fininvest to increase its share of Italy's total advertising market by at least 20 percent.

The Gasparri law would also enable television networks, such as Mediaset, to own newspapers, and could therefore further expand Berlusconi's sprawling media empire.

The reform would also mean that Berlusconi's Rete 4 channel - one of his three private networks - will be allowed to continue to broadcast on free-to-air television. Provisions had been made by previous centre-left governments to transfer Rete 4 to satellite TV, thereby freeing up 1600 terrestrial broadcasting frequencies.

If Rete4 were to shift to satellite TV, Mediaset's operating profit would fall by between 10% and 15%, according to analysts.

Mediaset controls 66% of Italy's TV advertising market and has a 43% audience share.

Parliament can now amend the media bill based on Ciampi's observations or vote on the law again without making any changes. If the bill passes a second time, Ciampi would technically be obliged to sign it.

Berlusconi's cabinet may also consider an emergency decree scrapping an end-of-the-year deadline for Rete 4 to switch to satellite.