Italy president starts talks to end political deadlock

Italian President Giorgio Napolitano began two days of talks with political leaders on Wednesday in a bid to form a new government in the eurozone's third largest economy amid fresh tensions in Europe over debt-hit Cyprus.

Italy is in political stalemate following February elections which saw the winning centre-left coalition led by Pier Luigi Bersani fail to secure enough votes for the majority needed to govern.

The deadlock has unnerved observers who warn that Italy risks falling back into the debt crisis.

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 former 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 later on Thursday with Bersani, who secured a majority in the lower house 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 and Monti will stay on in an interim capacity until a new government is formed.

Bersani has been seeking a deal with the M5S, which snapped up large amounts of protest votes, but the anti-establishment movement has so far refused to help the left form a majority.

Some Bersani allies have said he could be willing to compromise with the M5S by putting forward non-political figures for the government, like Carlo Petrini, founder of the "Slow Food" movement.

Berlusconi, who came second in the vote, has called for a "grand coalition in the interests of the country" but Bersani has excluded this.

"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 Il Sole 24 Ore business 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 return to the polls within a few months at most, observers say.

According to James Walston, international relations professor at the American University in Rome, Bersani could be given a mandate, or Napolitano could ask an outsider to explore grounds for a government, or the president himself could be forced to resign to prepare for early elections.

Napolitano cannot dissolve parliament himself because a president is not allowed to call new elections in the last three months of his mandate, which for the current incumbent 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.

Grasso was voted into the speaker's chair on Saturday, along with former human rights worker Laura Boldrini as speaker of the lower house -- an achievement considering the parliamentary tussles.

"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," Walston said.

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.

But Nichi Vendola, leader of the small "Left, Ecology, Freedom" party that is allied with Bersani said an "endless electoral campaign" would harm Italy.

"The political world has to feel Italy's pain," he said.