Italy's Letta woos all sides in race to form coalition

Italy's prime minister-designate Enrico Letta scrambled on Friday to put together a coalition, as stocks fell in a sign of growing investor impatience over a two-month political deadlock in the eurozone's third-largest economy.

The Milan stock market closed down 0.51 percent as earlier hopes that Letta would unveil his coalition on Friday fell through and informal talks with the parties continued.

The government is expected to be sworn in on Saturday, Italian media reported, citing sources in Letta's staff.

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

On Friday, he met President Giorgio Napolitano, who nominated Letta on Wednesday and has threatened to resign if no cabinet is formed.

Most analysts were upbeat about his chances despite the 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".

The lower and upper house of parliament are expected to meet on Monday and Tuesday for confidence votes on the new government.

But commentators warned that the bickering parties -- which stalled the formation of a government for two months following inconclusive elections in February -- would not easily work together.

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

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

Berlusconi held lengthy negotiations with key members of his party on Friday to hammer out details of a possible accord with Letta, postponing a late meeting with the prime minister-designate and raising fears of a further delay in the deal, Italian media said.

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

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

"I think even Brussels is becoming convinced that there has been too much austerity," Berlusconi told the Corriere della Sera daily.

The scandal-tainted tycoon ruled out his own inclusion in the cabinet, but his critics said the media magnate was the real victor of the political crisis and would be a power behind the throne.

In two trials due to resume next month, Berlusconi is appealing a tax fraud conviction and defending himself on charges of having sex with a 17-year-old prostitute.

Observers said Berlusconi's recent gain in the polls meant he could push for Letta to choose ministers likely to favour him and offer him some protection in his legal battles.

"There's an infallible way to know how things are going for this country and what form the new government is taking: Berlusconi's expression," said anti-mafia prosecutor Antonio Di Pietro.

"When he has a smile from one ear to the other, it is a sign things are going very well for him and badly for us," he said.

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.

A coalition government "should be assured of a confidence vote in parliament" but risks creating "a high level of tension between the parties -- unless this tension explodes from the start and the government doesn't even get off the ground," said Lucia Annunziata for Huffington Post Italia.

"Will the government be stable enough to press on with reforms? Highly unlikely, because of the internal contradictions," James Walston, international relations professor at the American University in Rome, wrote on his blog.

Meanwhile former comedian Beppe Grillo, head of the Five Star Movement protest party which won a quarter of the vote and came in third place, derided the impending deal between right and left.

"The government that is being born is a pile-up worthy of the best bunga bunga," Grillo said on his blog, in reference to the alleged raunchy parties hosted by Berlusconi when he was premier.