Analysis - Italy crisis close to an end but problems not over

ROME (Reuters) - Months of paralysing political deadlock seem close to an end in Italy with a new government possible by early next week, but there are many questions over how long the stability can last.

Centre-left deputy leader Enrico Letta, 46, on Wednesday accepted a mandate from President Giorgio Napolitano to form a broad-based coalition government, which is expected to be a mix of technocrats and politicians.

However, even before Letta was chosen, two months after an inconclusive February election, there were danger signs from the centre-right bloc of Silvio Berlusconi, which tried to set pre-conditions for the new government. Letta also faces risks from deep divisions in his own centre-left.

Following is a review of the scenarios for the short and medium term and the possible obstacles to a period of stability long enough to allow Italy to pass vital reforms.

DANGERS FOR NEW GOVERNMENT

Letta, an urbane pro-European career politician, is expected to announce a mix of technocrat and political ministers by the weekend, with a vote of confidence by early next week.

Both Letta's own centre-left and Berlusconi's centre-right, plus the centrists of outgoing technocrat Prime Minister Mario Monti, have promised support for a broad government.

The ministers could include members of Monti's government or of the two commissions of "sages" that Napolitano set up last month to propose reforms to mend the broken political system and address a chronic recession that has stoked public anger.

However, even before Letta was named, Renato Brunetta, lower house leader of Berlusconi's People of Freedom (PDL) party, said they would only back a new government if promised to scrap a hated housing tax introduced by Monti, a suggestion seen as a non-starter both on the left and among many economists.

The statement immediately impacted markets with Italy's 10-year bond yields rising slightly. Letta said he would not form a government "at any cost", warning there must be compromises.

However, although the PDL position could spell trouble for Letta in the future, it is unlikely to prevent the formation of a government.

Napolitano, 87, who was reluctantly re-elected last weekend, has emerged from the turmoil with his power greatly enhanced compared to the previous few months, when as an outgoing president his arms were constitutionally tied.

Now he not only has the big stick of being able to call a snap election, which many politicians want to avoid, but has forced the party leaders to give him solid assurances of cooperation after they begged him to stay on - something he pointedly reminded them of after giving Letta his mandate.

He has threatened to resign if the politicians do not act more responsibly.

Brunetta's remarks were an acid reminder, however, that the Monti government struggled to pass legislation and finally fell apart because of sharp differences between the centre-left and centre-right who supported it in parliament.

In addition, Berlusconi is riding high on the back of turmoil and division in the centre left, and has an eight-point opinion poll lead. He could pull the plug on a new government after a few months if he doesn't get his way.

Perhaps just as dangerous for Letta is the disarray in his own Democratic Party, which has come close to disintegration in the last week, with leader Pier Luigi Bersani resigning after rebels sabotaged his two choices for new Italian president.

There is open factional warfare inside the party which could make it difficult for Letta to rely on leftwing votes in parliament.

The former communist left wing of the party also opposes any coalition with Berlusconi, who faces a string of scandals, and divisions over this were at the centre of Bersani's troubles.

A section of the party could split off to join the leftist SEL party of Puglia governor Nichi Vendola in a new grouping.

Vendola, Bersani's ally in the February election, has already broken away and could move towards an opposition alliance with the third force in parliament, Beppe Grillo's populist 5-Star Movement, whose stunning success in the February election was one of the reasons for the current impasse.

If the government does get under way and builds momentum, its priorities will be policies to restore growth to a chronically stagnant economy, stimulate employment and reform a dysfunctional electoral law which is one of the main reasons for the long deadlock since February.

Estimates of the life of the new government vary between one and two years - if it survives at all.

A common prediction is that a new election could be held in June 2014, coinciding with European polls and saving money for Italy, which has one of the world's biggest public debts.

WINNERS AND LOSERS

By far the biggest loser is Bersani, an amiable but colourless politician whose string of errors have destroyed his career. He is said to be a broken man.

The biggest winner looks like Berlusconi, who is riding high, having overtaken the centre-left at the top of the opinion polls and projecting an image of statesmanlike restraint as Bersani's party falls apart. He had been calling for a broad based grand coalition for weeks.

It is an extraordinary reversal of fortunes from as recently as last November when Berlusconi looked like he was finished, with his party fractured and Bersani holding a 10-point lead in opinion polls.

Berlusconi, 76, has long been acknowledged as one of Italy's most skilful politicians, with enviable communication skills complemented by his television empire. Bersani has proved to be one of the worst.

However, Berlusconi will face a dilemma over whether to force an election while he is front, with all the risks of the current electoral law, or wait and allow Letta to build momentum and possibly mend rifts on the left.

Another winner looks like being Matteo Renzi, the 38-year-old mayor of Florence, an outspoken opponent of Bersani and who, in contrast, is a dynamic and effective politician.

His success is not unqualified. Berlusconi quickly torpedoed him when his name emerged on Tuesday as a possible new prime minister. But Bersani's decline and the discrediting of his leftist ruling clique has made Renzi more and more popular and he is the most likely next leader of the PD.

In any case, Renzi needs time to set himself up as the centre-left candidate in the next election which he is believed to want in about a year.

Renzi has long been seen as a game changer with the skills to defeat Grillo's rabble rousing tactics - unlike Bersani - and also attract a big chunk of centre-right voters.

But it remains to be seen whether a centre-left robbed of its left wing, which opposes Renzi, would be strong enough to defeat Berlusconi and Grillo in a new election.

Whether Grillo is a winner or loser from all this is the subject of debate, but there are signs he may be losing traction after a disappointing result in a regional vote last weekend.

Certainly, after weeks of perfect tactics he made a major blunder last Saturday by calling for a "march on Rome" to oppose what he denounced as an establishment stitch-up to re-elect Napolitano.

The inflammatory language, which evoked images of the march on Rome by fascist leader Benito Mussolini in 1922, was widely condemned.

Whatever happens, one man stands out as an unrivalled hero. Napolitano, dubbed "King George", has once again pulled the country back from the brink of disaster and consolidated his position as far and away its most popular politician.

(Editing by Giles Elgood)