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5-Star Movement leader Luigi Di Maio speaks to supporters in Pomigliano D'Arco, Italy, March 6, 2018. REUTERS/Ciro De Luca

(reuters_tickers)

By Steve Scherer

ROME (Reuters) - Italy's anti-establishment 5-Star Movement proposed a German-style governing contract with two of its rivals as formal talks aimed at seating a government began on Wednesday, a month after an election ended with a hung parliament.

The inconclusive March 4 vote left soft-spoken President Sergio Mattarella to coax sworn adversaries towards a coalition deal. The process could take weeks and still end in deadlock, which would force yet another vote, prolonging instability in the euro zone's third-largest economy.

In the election, a centre-right alliance taking in the far-right League and four-time prime minister Silvio Berlusconi's Forza Italia won the most seats, followed by the 5-Star and then the PD, but no group can govern alone.

Late on Tuesday, 5-Star prime ministerial candidate Luigi Di Maio, who commands the biggest single party in parliament, reached out to both to the centre-left Democratic Party (PD) and League leader Matteo Salvini, but with strict conditions.

So far, the PD - still influenced by its defeated former chief and ex-prime minister Matteo Renzi - has closed the door to any alliance with 5-Star, and Salvini has refused to break with the centre-right bloc.

"Salvini has to choose between revolution or restoration. In other words, whether to abandon Berlusconi and start to change Italy, or to cling to Berlusconi and change nothing," Di Maio said late Tuesday on prime-time talk show "Di Martedi".

"The PD now must choose whether to follow Renzi's line... which is irresponsible," Di Maio said, opening the door instead to the acting PD chief Maurizio Martina and praising some of the ministers in the caretaker PD government.

While Salvini said he would talk to 5-Star, he rejected "vetoes or commands", while Forza Italia's Chamber of Deputies leader Mariastella Gelmini said the centre-right should reach out to the PD, not 5-Star.

"We won't play these games," the PD's Martina said on Twitter. "Who is seeking to divide the PD won't succeed."

"UNIVERSAL INCOME", TAX CUTS

A 5-Star-League coalition would be the most alarming to investors. Five-Star has called for a "universal income" for the unemployed while the League is seeking drastic income tax cuts, both of which would balloon Europe's second-largest debt pile as a percentage of output and defy European Union budget rules.

The League also wants wholesale expulsions of migrants and is the only large party that wants Italy to dump the euro, but any deal to govern would exclude abandoning the single currency.

As part of any deal with either party, Di Maio would become prime minister and the partners would draft a list of policies similar to the 177-page document hammered out between German conservatives and Social Democrats to secure Angela Merkel a fourth term as chancellor earlier this year. Those negotiations took months to yield a deal.

Mattarella was meeting the speakers of both houses and former President Giorgio Napolitano on Wednesday morning, while in the afternoon small parliamentary groups will file into the hilltop Quirinale presidential palace.

The largest parties are due to meet Mattarella on Thursday. Those in the centre-right alliance will meet with him separately, a sign of the divisions already existing within the bloc, and Berlusconi has indicated he will accompany the Forza Italia delegation.

(Reporting by Steve Scherer; Editing by Mark Heinrich)

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Reuters