Italy's Letta scrambles to put together coalition

Italy's prime minister-designate Enrico Letta scrambled on Friday to put together a coalition to end a two-month deadlock as stocks lowered and borrowing costs rose in a sign of investor impatience.

The Milan stock market was down 0.95 percent in morning trading as earlier expectations that Letta would unveil his coalition on Friday or Saturday began to appear less likely.

The 46-year-old leftist moderate has said he wants to move quickly to tackle the social fallout of a painful recession and ease the austerity measures implemented by outgoing prime minister Mario Monti, who remains in charge.

Letta said on Thursday after talks with the main political forces that his attempt to put together a grand coalition had encountered "difficulties".

On Friday, he met with President Giorgio Napolitano to discuss the political situation.

Napolitano nominated Letta on Wednesday and has threatened to resign if no cabinet is formed.

Italian stocks were down nearly 1.0 percent in morning trading.

But most analysts were upbeat about his chances despite a delay.

"Letta is basically close to forming his government," said Stefano Folli, a political commentator for business daily Il Sole 24 Ore, adding that the nominee could "scale the mountain by Saturday evening or Sunday morning".

Letta's leftist Democratic Party, which narrowly won a general election in February that led to the impasse, is deeply divided over going into government with former prime minister Silvio Berlusconi's People of Freedom party.

It has already broken with its coalition partner, the small "Left, Ecology and Freedom" party, which has said it will be in opposition to any new cabinet.

Letta is also engaged in tricky negotiations with the scandal-tainted billionaire tycoon Berlusconi, whose votes his government will depend on.

The head of Berlusconi's centre-right party, Angelino Alfano, said after talks with Letta on Thursday said there had been a general "understanding" on forming a government but there were still "knots left to unravel".

In interviews with Italian newspapers published on Friday, Berlusconi indicated his party would not hold up the formation of a government but called for a sharp rejection of outgoing Prime Minister Mario Monti's austerity.

"We could think about confronting Europe, explaining that the limit of 3.0 percent on the deficit and the fiscal compact are correct but not when you are already in recession," Berlusconi told Corriere della Sera in an interview.

"I think even Brussels is becoming convinced that there has been too much austerity," he said.

Monti "terrorized by fixing lethal targets. Now we need a political government that can re-start the economy," said the scandal-tainted tycoon, who is unlikely to be included in the cabinet himself.

In two trials due to resume next month, Berlusconi is appealing a tax fraud conviction and defending himself on two charges of having sex with an underage 17-year-old prostitute and abuse of power when he was still prime minister.

Most analysts say any new government would be short-lived and will be brought down by irreconcilable differences that can only be resolved through another general election.