By Paolo Biondi
ROME (Reuters) - Italian President Giorgio Napolitano was set to name a new premier on Wednesday with Enrico Letta, deputy head of the centre-left Democratic Party, and veteran politician Giuliano Amato seen as front runners to head a grand coalition.
The new government, which could take office in a matter of days, would be backed primarily by the rival centre-left and centre-right groupings, which had hitherto refused to cut a deal following inconclusive elections in late February.
Political sources said on Wednesday Napolitano was leaning towards naming Enrico Letta, 46, having previously favoured Amato, a two-times prime minister.
Silvio Berlusconi's People of Freedom (PDL) party, Letta's PD and the centrist Civic Choice movement of outgoing premier Mario Monti have all said they would cooperate with whoever Napolitano chooses.
"Given the crisis the country finds itself in, the country needs a strong, a durable government that can make important decisions ..." Berlusconi said after meeting Napolitano.
Letta, the nephew of Berlusconi's long-time chief of staff Gianni Letta, is considered a moderate close to former party leader Pier Luigi Bersani, who resigned at the weekend after factional rebels sabotaged him in the voting for a new president, which ended with Napolitano being re-elected.
Letta said on Tuesday his party would back any government committed to tackling the "social-economic emergency," and enacting serious political reform, including changes to a dysfunctional electoral law considered largely responsible for the two-month long political stalemate.
In February's general election, the centre-left narrowly won a majority in the lower house but failed to win control of the Senate and was not able to form a government.
Hopes that the impasse would soon be over have given a further boost to financial markets, with the yield on 10-year Italian government bonds dropping below 4 percent and the spread, or risk premium over German bonds, narrowing.
Italy's economy has been the most sluggish in Europe for more than a decade and mired in a deep recession since the middle of 2011, with no recovery in sight.
POLITICAL "IRRESPONSIBILITY"
Napolitano angrily scolded the parties on Monday when he was inaugurated for an unprecedented second term, berating them for their "irresponsibility" in prolonging a political deadlock for nearly two months.
He threatened to resign unless the parties agreed to cooperate and find some middle ground on much needed reforms.
The PD has emerged the most scarred from the crisis and its fractures could threaten the stability of the next government given the hostility among many in the party to any deal with Berlusconi, their enemy for almost two decades.
Deep internal divisions worsened when Bersani was unable to make a government deal with either Berlusconi's centre-right or the shock new third political force, Beppe Grillo's 5-Star Movement.
Berlusconi has capitalised on the centre-left's woes. One poll gave the centre-right a clear lead of around 8 points.
The anti-establishment 5-Star Movement, which won a quarter of the vote and speaks for millions of Italians disillusioned with an entire political class, told Napolitano it would sit in opposition and may support specific reforms.
The Left Ecology Freedom party (SEL), a partner of the PD in the February election, and Berlusconi's allies in the Northern League also said they would not join a coalition led by Amato.
(Additional reporting by James Mackenzie, editing by Robin Pomeroy and Barry Moody)
