Take Piero Bettini, a 56-year-old metal industry parts salesman from Bologna. Bettini, who drives around 5,000 kilometres a week, owns two diesel-fuelled cars: a spacious Volvo XC70 and a smaller, fuel-efficient Hyundai iX20.

"I used to just use the Volvo because it's bigger and more comfortable and left the Hyundai to drive in the city," Bettini said. "But now I'm using the Hyundai most of the time, including holidays, because it's cheaper."

Prime Minister Mario Monti's decision to hike petrol taxes to rake in much-needed revenue has pushed up fuel prices by 15 percent over the last year, making them the highest in Europe.

Prices at the pump recently broke through 2 euros per litre in some stations, a psychological threshold for car enthusiasts in the home of gas-guzzling sportscar marques such as Ferrari and Lamborghini.

Average prices across Italy are around 1.87 euros a litre, compared with a European Union average of 1.60 euros, according to Italian auto industry think tank Promotor.

"It's all a bit too much. Italians are travelling shorter distances, they're using the train more, they're even going on holiday together to cut costs," said Orazio Rienzi, president of consumer group Codacons.

As the recession bites, the government is looking for revenue streams to meet the soaring costs of the world's fourth-biggest public debt. And with car ownership one of the highest in the world, at around 60 cars for every 100 people, petrol seems an obvious choice.

Taxes account for some 60 percent of pump prices. In the first eight months of the year the state raised 24.5 billion euros in fuel taxes, up 17.4 percent on the year, according to Promotor.

According to the national farmers' association Coldiretti, with petrol at 2 euros per litre, Italian families are spending more per week on filling their car than on food, forking out 120 euros for a 60-litre tankfull compared with a food bill of 110 euros.

DRIVING LESS

All the signs are that Italians are driving less. Atlantia (ATL.MI), the company that operates most of Italy's toll roads, said traffic volumes in the July-August holiday period fell 5.9 percent on the year before, while traffic on the fast inter-city trains rose 13 percent in the first half.

Car-sharing schemes are also booming. "In the last year car pooling has jumped 250 percent in response to rising fuel and costs. Some people have ditched their second car, some even their first," says Marco Menichetti, who works on the traffic desk of environmental protection watchdog Leg a mbiente in Milan.

With more than 80 percent of commercial goods transported by road, dearer fuel could feed through into store prices and clobber consumer spending.

"Italian diesel prices are 23 eurocents more than the European mean. That puts us at a real competitive disadvantage in an EU market where there's supposed to be a level playing field," said Cinzia Franchini, president of national hauliers association CNA-Fita.

High fuel prices could also exacerbate a slump in car sales, including those of carmaker Fiat (FIA.MI), which has seen its sales falling to levels not seen since the 1970s.

"It's not just fuel, it's insurance, car tax, parts, the lot - everything's going up. I've always changed cars regularly, but this year I'm hanging on to the old one," said Marco, a 43-year-old salesman in Milan.

In August, new car sales in Italy fell 20 percent on the year before, their ninth consecutive double-digit fall. Jacques Bousquet, president of Italian foreign carmakers association UNRAE, said motorists are increasingly in the market for vehicles that consume and pollute less, with LPG-powered cars sales for instance holding up well.

PUMP WAR

But soaring petrol prices have also created something Italy hasn't been much good at over the years - competition. More and more distributors are putting together special offers and are structuring deals with retailers to attract clients.

Eni SpA (ENI.MI), Italy's state-controlled oil and gas group, had motorists queuing up outside its stations this summer when it offered discounts of around 20 cents per litre at self-service stations over the weekend.

IP, owned by Italian refiner Api, and Exxon Mobil's (XOM.N) Esso, were quick to follow suit with end-of-summer discounts, while the Q8 network set up an agreement with supermarket chain Esselunga offering 8 euros off a purchase of at least 40 euros.

But station operators are feeling the squeeze. "We've seen a big slump in sales since the government hiked taxes in December. Drivers are now spending 10 to 20 euros a go, rather than 50 euros, to keep cash in their pockets," said Francesco Squeri, who runs a filling station on Milan's expressway.

Italy has one of the most fragmented fuel distribution networks in Europe, with some 23,000 stations, about double those in some like-sized countries such as France and Spain, according to the Italian government.

That is triggering a lose-lose situation of dwindling margins for the operator and higher prices for the consumer.

The government has said it intends to reform the sector, introducing more self-service stations and making it easier for operators to sell other petrol brands and non-oil products.

"I don't buy petrol from brand retailers any more, but use independent service stations where I spend 6 to 7 percent less," Bettini, the Bologna salesman, said.

But even though Italy may be coming off its auto addiction, not every Italian tradition is under threat. Fiat's new 500 model, the 500L, offers an espresso machine as an optional extra. Early days yet but feedback has been positive, Fiat says.

A Fiat and an espresso. What could be a more Italian combination. (Additional reporting by Danilo Masoni; Editing by David Holmes)

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