Italy parties split as president seeks way forward

ROME (Reuters) - Italy's political parties remained far apart on Thursday as President Giorgio Napolitano sought to form a government after last month's deadlocked election left no group with a majority in parliament.

The election gave Democratic Party leader Pier Luigi Bersani's centre-left alliance with the leftist SEL party a majority in the lower house but not in the Senate, leaving it unable to govern without the support of other parties.

The stalemate has revived fears of a prolonged bout of instability in the euro zone's third largest economy just as the crisis over bank deposits in Cyprus has raised concern of a fresh bout of financial market turmoil.

Former prime minister Silvio Berlusconi repeated his demand that Bersani form a coalition with his conservative bloc and that Napolitano's successor as head of state should be from the centre right. Napolitano's term ends on May 15.

That offer has already been firmly rejected by Bersani, who is due to meet Napolitano at 6 p.m. (1700 GMT) but Berlusconi said there was no alternative.

"There are two forces still in play, us and the Democratic Party, and at this moment the responsibility to give a government to the country lies with both of us," he told reporters after meeting Napolitano.

If no agreement can be struck, Italy faces the prospect of a brief period under a caretaker government before heading for a new election, possibly as early as June or after the summer holiday months, in September or October.

With the country in deep recession and struggling with record unemployment and a 2-trillion-euro debt pile that remains vulnerable to the kind of financial market crisis that struck in 2011, business leaders and European partners are deeply concerned at the stalemate.

Italian bank association ABI said there was urgent need for deep institutional and economic reform.

"We need an authoritative government that can operate efficiently on both," it said in a statement.

LIMITED PROGRAMME

The meeting with centre-left officials later on Thursday will be the final in the current round of consultations but an official close to the president's office said that Napolitano was unlikely to announce any decision until Friday.

The president has some room to appoint a technocrat prime minister from outside the main parties but any government would need the support of parliament.

Berlusconi received some encouragement on Thursday from opinion polls showing the centre right and centre left neck and neck, with one poll putting his formation slightly ahead if there were another election.

Bersani has said he will present a limited programme of policies, focused on institutional reform, fighting corruption and creating jobs and seek the backing of parliament, even if he does not have any formal coalition agreement in advance.

For its part, Beppe Grillo's anti-establishment 5-Star Movement (M5S), which holds the balance of power in parliament, asked Napolitano for a mandate of its own, though it declined to say who it would present as prime minister.

The head of the 5-Star Senate group, Vito Crimi, said the party presented its platform of policies to Napolitano, including a referendum on Italy's future in the euro and measures on issues including tax and party finance reform.

Grillo made clear the movement would not support a government led by any other party or any so-called "president's government" appointed by Napolitano.

"M5S will not give any confidence vote to political or pseudo-technocrat governments," Grillo said on his blog.

He explicitly rejected one option, widely mooted in Italian newspapers, that the newly elected speaker of the Senate, former anti-mafia judge Pietro Grasso, could be asked to lead a government.

Grasso is seen as a potential replacement for Bersani, whose position has been under threat ever since the election in which the centre left threw away a 10 point lead. He said on Thursday that he was "ready to serve for the good of the country".

Underlining the problems facing any new administration, Prime Minister Mario Monti's caretaker government cut its economic forecast for 2013 to a contraction of 1.3 percent and raised its budget deficit target.

(Additional reporting by Naomi O'Leary, Roberto Landucci, Giuseppe Fonte; Editing by Alison Williams)

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