Suspense in Italy ahead of government announcement

Italy was in suspense on Friday as President Giorgio Napolitano prepared to unveil his choice of who should try to form the next government after elections last month that left no clear winner in the eurozone's third largest economy.

The centre-left, led by ex-communist Pier Luigi Bersani, narrowly won the February 24-25 elections but failed to secure enough votes in the upper house for the majority it would need to govern.

The divisions between political parties over how to proceed has revived fears Italy could plunge back into the eurozone crisis, just as a bitter standoff over a bailout for Cyprus intensifies.

Napolitano, who is playing a steering role in the current crisis, has hosted two days of talks this week with all the parties in parliament in a bid to find consensus behind a new government.

Any new cabinet needs a majority in both houses and while the centre-left controls the lower house, no group won a majority in the Senate.

Most analysts say Bersani is likely to get the nod from Napolitano but may then fail to garner a majority in the Senate despite his attempts to woo the anti-establishment Five Star Movement party.

Two other scenarios mooted in recent days would be a technocratic government similar to the outgoing one of Prime Minister Mario Monti or a grand coalition between left and right or some combination of the two but without Bersani.

All parties agree at least that there are urgent economic issues to be dealt with as Italy endures its longest recession in two decades, with many ordinary Italians struggling to make ends meet.

Investors have been watching developments nervously and the stock market was hovering at around zero-percent change during trading.

Whatever government may be formed, there will have to be early elections to resolve the deadlock possibly within months and after the reform of a widely criticised electoral law, analysts say.

In a surprise move on Thursday after talks with Napolitano, Bersani appeared to indicate a willingness to work with rival Silvio Berlusconi's centre-right and suggested his party could back a cabinet led by someone other than himself.

The demand for political stability came not just from Italians "but from Europe, which is attentively and anxiously watching us", he said.

Bersani had previously excluded a grand coalition with Berlusconi -- a scandal-tainted former prime minister involved in several court cases -- and it would prove hugely controversial among leftists.

"The only solution to avoid returning to the polls this summer and having another sterile election campaign is to prioritise the most urgent measures to help the country breathe again," said Mario Calabresi, editor of La Stampa daily.

Berlusconi, whose centre-right coalition came a close second in the February vote, has said his party is open to a coalition which would push economic measures that enjoyed broad support.

Corriere della Sera columnist Sergio Romano said that while there could be no "organic alliance" between right and left, the differences between the two were "not so great" as to prevent a deal.

Romano said such a government would not last the full five-year mandate but that the next elections could be held off at least for "a couple of years".

The left has so far failed to woo the Five Star Movement, a new protest party that gathered millions of votes from Italians fed up with austerity and the perks enjoyed by politicians.

Monti, an economics professor installed by parliament, after Berlusconi's ouster in November 2011 came a distant fourth in the elections.

Praised abroad for his budget discipline and ambitious reforms, Monti has lost support in Italy as the social cost of the crisis has increased.

The government on Thursday slashed forecasts, saying it now expected a public deficit of 2.9 percent of gross domestic product (GDP) this year -- far higher than the 0.5 percent promised before.

The government also forecast the economy would shrink by 1.3 percent this year -- compared with an expected contraction of 0.2 percent before -- but said it would grow by 1.3 percent next year.