Mr Berlusconi began his six month EU presidency by comparing a German MEP to a Nazi. Then Italy's tourism minister said all German tourists were "hyper-nationalistic blondes", which prompted Chancellor Gerhard Schroeder to cancel his Italian holiday.
Towns from the Amalfi coast to the Alps had offered their hospitality to Mr Schroeder, concerned that the dispute would persuade millions of big-spending Germans to holiday elsewhere this year.
Interior Minister Otto Schily said many Germans could head for the Croatian coast, Spain or France instead.
Yesterday, Umberto Bossi, a leader of the Northern League and a key ally of the prime minister, said that "if Captain Berlusconi does not set the course, the ship will dash against the rocks".
Tourism minister Stefano Stefani, who made the disparaging remarks about German holidaymakers, is a Northern League member.
Mr Berlusconi has called on his coalition allies to play down their differences over the next six months in the hope his EU presidency will run smoothly.
"I have just let the boys let off steam," he said yesterday at the end of yet another day of tension.
After two years in power, all the coalition parties are voicing their disappointment with the government's programme but each for its own reason.
The League, which brought down Mr Berlusconi's first government in 1994, claimed promises to give regions more power have gone unfulfilled.
It has also threatened to pull out of the government unless it does more to crack down on illegal immigrants.
The right wing National Alliance wants to have a say in economic policy, which is currently overseen by Economy Minister Giulio Tremonti of Mr Berlusconi's Forza Italia party.
But an effort to set up a government body on economic reforms which was to be led by National Alliance leader and Deputy Premier Gianfranco Fini collapsed after some cabinet ministers said they would not take part in it.
Italy's rocky start as EU president has also taken its toll at home.
When Mr Berlusconi told German MEP Martin Schulz in the European Parliament that he would make a "perfect" Nazi concentration camp guard in a film, some of his closest allies expressed embarrassment and distanced themselves.