Italy president starts talks to end political deadlock

Italian President Giorgio Napolitano began two days of consultations with political leaders on Wednesday in a bid to determine who should be given the mandate to form a new government in the eurozone's third largest economy.

The country is in political stalemate following February elections which saw the winning centre-left coalition fail to secure enough votes for the majority needed to govern.

The deadlock has unnerved economic and political observers in Europe who warn that Italy risks falling back into the grip of the debt crisis -- fears heightened in light of the bitter standoff over bank deposits in Cyprus which is sending tremors through the eurozone.

Talks began with minor parties, including Prime Minister Mario Monti's centrist bloc which came fourth in the February 24-25 election.

Napolitano is set to meet Thursday with comedian Beppe Grillo, founder of the Internet-based Five Star Movement (M5S), and former premier Silvio Berlusconi and his centre-right People of Freedom party (PDL).

The talks are expected to wind up Thursday with Pier Luigi Bersani, leader of a centre-left coalition which secured a majority in the lower house at the election but lost out in the Senate.

Political observers say Napolitano is likely to offer the mandate to Bersani, but only if the former Communist can persuade the president that he has the support of other parties to govern.

Napolitano's decision is not expected before Friday.

Monti will stay on in an interim capacity until a new government is formed.

Bersani and his Democratic Party (PD) has been seeking a deal with the M5S, which snapped up large amounts of protest votes, but the anti-politics movement has so far refused to help the left form a majority.

A glimmer of hope came at the weekend when two non-mainstream centre-left candidates were elected as parliament speakers, with some votes also coming from M5S members eager for a break with established politicians.

The speakers, a former spokeswoman for the UN refugee agency and an anti-mafia judge, announced Tuesday they would take a 30 percent wage cut in a move aimed at showing that the centre-left is pushing key M5S policies.

Bersani is working on presenting a line-up of outsiders who would appeal to the M5S, according to PD member Pippo Civati.

"A government made up of authoritative and popular names... names which would not annoy the M5S and persuade it to give a vote of confidence. An 'All Star' government to convince the Five Star Movement," Civati wrote on his blog.

Among those being touted are Carlo Petrini, founder of the "Slow Food" movement and Giampaolo Galli, former director general of Italy's Confindustria business association.

"The aim is without doubt ambitious: to seduce the M5S without giving up control of the helm. It is no easy challenge, perhaps too great for Bersani," political commentator Stefano Folli said in the Sole 24 Ore daily.

Should no deal between the divided parties be forthcoming, Napolitano may be forced to install a caretaker government for a short period and Italians could be back at the polls as early as June, observers say.

According to James Walston, international relations professor at the American University in Rome, there are three possible outcomes: Bersani could be given a mandate, Napolitano could ask an outsider to explore grounds for a government, or the president could be forced to call for early elections.

Napolitano cannot dissolve parliament himself because the constitution says a president cannot call new elections in the last three months of his mandate, which for Napolitano runs out in May.

Should the political impasse continue, Napolitano may therefore be forced to resign early, allowing a new president to be elected who could dissolve parliament and call elections, Walston said.

"There's a good possibility Napolitano will appoint an interim government, maybe led by the new Senate speaker, anti-mafia judge Pietro Grasso," he said.

"It will be a semi-political, semi-technocrat government which would have a year, maybe two, to carry out a list of urgent tasks, after which the country would return to the vote."

Among proposals for the limited package of reforms are an overhaul of the electoral law, the reduction of the bloated costs of politics and new jobs in the recession-hit country.