Italy's center-left prime minister-designate Enrico Letta met Silvio Berlusconi and other center-right officials on Saturday to try to resolve the remaining differences holding up the formation of a coalition government between the rival parties.
Letta, given a mandate to form a government by President Giorgio Napolitano, is under pressure to reach an agreement with the center-right to end the political stalemate that has paralyzed Italy since inconclusive elections in February.
Agreement has been held up by wrangling over ministerial posts and policy differences, notably over Berlusconi's demand to scrap the unpopular IMU housing tax, a move that would blow an 8 billion euro hole in this year's budget plans.
Letta, a 46-year-old moderate on the right of his Democratic Party and the nephew of one of Berlusconi's closest aides, said on Friday that he was determined to reach an accord.
If the two sides can come to an agreement on Saturday, he could go before parliament for a confidence vote as early as Monday.
Italy, the euro zone's third-largest economy, has been without an effective government for months, with the long post-election deadlock holding up any concerted effort to end a recession set to become the longest since World War Two.
Letta received some encouragement late on Friday when the ratings agency Moody's kept its rating on Italian government debt unchanged at Baa2 because low interest rates were making it possible to buy time to implement much-needed reforms.
Bond yields have fallen to their lowest in more than two years as investors hope for enough stability to help Italy revive its economy and gradually tackle its large public debt.
However Moody's also said medium-term growth prospects were weak and forecast the economy would shrink by 1.8 percent this year, compounding more than two decades of stagnation.
Letta has said his priorities will be boosting the economy and tackling unemployment, restoring confidence in Italy's discredited political institutions and trying to turn Europe away from austerity to focus more on growth and investment.
On paper, the priorities laid out by Letta fit in well with proposals from Berlusconi's camp, which has been attacking the austerity policies pursued for months by the outgoing prime minister, Mario Monti.
But the selection of ministers will show more clearly how a Letta government will work in practice.
Berlusconi, in the middle of legal battles over a tax fraud conviction and charges of paying for sex with a minor, has pressed for the cabinet to include has close political allies, and has rejected technocrats such as those who served in Monti's government.
He has backed Renato Brunetta, the lower house leader of his People of Freedom (PDL) party, for the key Economy Ministry and also wants to place party secretary Angelino Alfano in the government, possibly as deputy prime minister.
However there is strong resistance in parts of the Democratic Party to an accord with Berlusconi, its sworn enemy for almost 20 years.
Former party leader Pier Luigi Bersani, who resigned this month after a party rebellion, told Letta on Saturday that he should not accept a deal with the PDL on any terms, according to a person with knowledge of their conversation.
Without an agreement, there would be no alternative to new elections, a disastrous prospect for the center-left, which threw away a 10-point lead before the last poll and now trails Berlusconi by more than five points, according to a poll by the SWG institute on Friday.
The other main force in parliament, Beppe Grillo's anti-establishment 5-Star Movement, has ruled out taking part in a government made up of the two main parties. He called the right-left coalition "an orgy worthy of the best of bunga bunga", a reference to Berlusconi's much publicized parties at his private villas.