End game looms for Italy's government riddle

Italy was headed for a new government that would bring left and right together, ending a two-month deadlock in the eurozone's third largest economy that has stalled reforms and alarmed Europe.

President Giorgio Napolitano held a daylong round of talks with all the main political leaders on Tuesday and was expected to announce his nomination for prime minister on Wednesday.

The leftist Democratic Party, which had previously ruled out an alliance with Silvio Berlusconi's People of Freedom party, said it was open to any option suggested by the 87-year-old president.

"We respect the choice that the president of the republic will announce tomorrow," the party's deputy leader Enrico Letta said after meeting with Napolitano, who has called for a grand coalition.

Berlusconi said his party would "support as much as possible" whoever is nominated by the president to be the prime minister, adding that he wanted "not a temporary government but a lasting one".

The centrist Civic Choice group led by outgoing Prime Minister Mario Monti,a former European commissioner who took over from Berlusconi in 2011, said it would support Napolitano's choice.

The combination of right, centre and left would mirror the loose alliance that backed Monti's technocratic government until Berlusconi pulled his party's support for it in December.

A centre-left coalition led by the Democratic Party (PD) came first in February elections but failed to win a parliamentary majority, with Berlusconi coming in just behind in second place.

The PD has been badly divided since then and its entire leadership resigned on Friday after two of its presidential nominations failed to get voted because of a rebellion within party ranks.

Napolitano was eventually re-elected to a second term on Saturday -- the first Italian president to stay on -- after the main political parties pleaded with him to resolve their differences.

At his swearing-in on Monday, Napolitano accused the parties of being "deaf" to the calls for reform from ordinary Italians and of committing "mistakes, omissions and irresponsibility".

He threatened to resign if the parties continued their "fatal stalling" and said they should form a government "without delay" based on a realistic assessment of their strength in parliament.

The Five Star Movement, a new protest party that won a quarter of the vote and came third in the elections, said on Tuesday it had not agreed to join any government and would be in opposition.

The party made headlines again on Tuesday when its leader, former comedian Beppe Grillo, 64, said in an interview with Germany's top-selling Bild newspaper that he wanted a "German invasion of Italy to ensure "honest, competent" politicians.

Several smaller parties on both the right and the left also said they would stay out of the new government, including the "Left, Ecology and Liberty" (SEL) party led by Nichi Vendola.

"We are totally against the birth of a grand coalition government," Vendola said, adding that any cabinet that included Berlusconi loyalists would be unacceptable to his electorate.

"The centre-right has destroyed Italy," he said.

The idea of being in government with Berlusconi's party has been controversial within the PD too, reinforcing long-standing divisions that are now threatening to tear the leftists apart.

The most likely choice to be the new prime minister is former premier Giuliano Amato, a committed Europhile who started out in politics in the 1990s but has a relatively neutral reputation.

Another possibility mentioned in recent days is that of leftist Matteo Renzi, the 38-year-old mayor of Florence, a reformer inspired by the example of US President Barack Obama.

Interior Minister Anna Maria Cancellieri, a former prefect with a strong reputation fighting corruption and the mafia, is also possible and would be Italy's first female prime minister.

Italy has been in limbo since the inconclusive general election on February 24-25 and Monti's government has limped on with only interim powers.

Business leaders, trade unionists and the Catholic Church have urged politicians to act quickly as a painful recession forces firms to shut down and leaves many Italians struggling to make ends meet.

The financial markets responded well to the reports of an imminent end to the deadlock, with stocks in Milan closing 2.93 percent higher.

Borrowing costs on Italian 10-year government bonds also fell to their lowest levels since 2010 -- a sign of greater investor confidence.