By James Mackenzie
ROME (Reuters) - Italy's newly re-elected president Giorgio Napolitano will push forward on Monday with efforts to form a new government and end two months of stalemate that blocked economic reform and created growing unease among Rome's international partners.
Financial markets opened higher, with the main barometer of investor confidence, the spread between yields on 10-year Italian bonds and their safer German counterparts, narrowing sharply and Italian stocks among the main gainers across Europe.
The 87-year-old Napolitano, the first Italian president ever to be re-elected, yielded to the pleas of the bickering parties on Saturday after parliament had failed in repeated votes to elect a successor.
He will address parliament at 5 p.m. (1500 GMT) and is expected to push for swift agreement on a new government, possibly as early as Wednesday, with a programme to reform the economy and Italy's ineffective political institutions.
Italian newspapers said former Prime Minister Giuliano Amato, 75, was Napolitano's favourite to head a new administration likely to be a mix of technocrats and politicians from the traditional parties.
However, worries about the future stability of a government that will need the support of parliament to survive were underlined by deep divisions in the main centre-left Democratic Party (PD), which is close to self-destruction.
PD leader Pier Luigi Bersani announced his resignation on Friday after factional rebels sabotaged two attempts to elect a centre-left candidate as president, leaving rival groups fighting for control.
The turmoil in the PD has left centre-right leader Silvio Berlusconi with a decisive advantage but has made it more difficult to ensure that divided centre-left parliamentarians will provide solid support to a new government.
Beppe Grillo's anti-establishment 5-Star Movement, the third largest force in parliament, protested against Napolitano's re-election and will oppose the new government, which Grillo said was created only to protect a discredited political class.
Thousands of people protested in Rome on Sunday and the bitter public mood was highlighted when a crowd jeered Dario Franceschini, a senior PD party official, while he had dinner in a restaurant in the city centre.
Berlusconi's People of Freedom (PDL) party insisted it would only accept a coalition government giving it a share of power with the PD, which won control of the lower house but fell short of a full majority in parliament in the election in February.
"There needs to be a government that lasts at least two years, not an artificial little government or one that lasts six months. We may as well have new elections in that case," Fabrizio Chicchito, one of Berlusconi's closest aides, told the daily Corriere della Sera.
He said the centre-right would press for an end to the austerity policies followed by Monti's technocrat government to combat the financial crisis that ended Berlusconi's last term as prime minister.
Much will depend on the future of the PD, which is split into a dozen different factions linked to competing party barons and which now faces the threat of implosion.
Matteo Renzi, the 38-year-old mayor of Florence who is seen as a likely future leader of the PD, said the party needed to regroup around concrete ideas for reforms.
"We are the Democratic Party of Obama, of Hollande of Clinton. We are the Democratic Party that wins elections," he told the daily La Repubblica in an interview.
He said a new government had to attack the bloated cost of the political system and he called for an end to state financing of parties. But he said the new administration should last no longer than a year before new elections.
"We should give ourselves some time but if we've realised a few of these interventions in six months or a year, it will be a gain for the PD and the country," he said.
(Reporting By James Mackenzie; editing by Barry Moody and Giles Elgood)