By Gavin Jones and Isla Binnie
ROME (Reuters) - Italy will vote on March 4 in an election expected to produce a hung parliament, instability and possible market turbulence in the euro zone's third largest economy.
Prime Minister Paolo Gentiloni's cabinet set the date of the vote after the president dissolved parliament on Thursday, formally opening an election campaign which in practice has already been raging bitterly for weeks.
With opinion polls suggesting no one will win a parliamentary majority, Gentiloni said he would remain in office and ensure continuity until a new administration was in place.
As things stand, a centre-right alliance around Silvio Berlusconi's Forza Italia (Go Italy!) looks set to take the largest number of seats - potentially catapulting the 81-year-old four-times premier back to centre stage even though he cannot become prime minister due to a tax fraud conviction.
Gentiloni told reporters at the end of his one-year spell in power that Italy should not fear uncertainty, noting that it was now common to many European countries.
"We mustn't dramatise the risk of instability, we are quite inoculated against it," he said, in reference to Italy's frequent changes of government, adding that elsewhere in Europe there has been "an Italianisation of political systems".
Germany is locked in talks to produce a new government after inconclusive elections, while Spain and Portugal have minority governments and Britain is in tangled negotiations over its exit from the European Union.
However, Italy, with the largest public debt in the euro zone after Greece's and one of the bloc's highest jobless rates, is considered particularly vulnerable.
Its economy is on course this year for its firmest growth since 2010, but it remains among the most sluggish performers in Europe as it has been since the start of monetary union in 1999.
Gentiloni is the third prime minister since the last election in 2013, which also produced no clear winner. His predecessor, Matteo Renzi, quit in December 2016 after voters threw out his planned constitutional reforms in a referendum.
Speaking earlier on Thursday at the prime minister's traditional year-end news conference, Gentiloni appealed to parties not to peddle fear and make unrealistic promises.
All the main political forces are pledging to raise the budget deficit and slash taxes despite record high public debt, and immigration is set to be a central theme of the campaign, with right-wing parties frequently warning of a migrant "invasion".
The anti-establishment 5-Star Movement leads opinion polls with about 28 percent of the vote, followed by the ruling Democratic Party (PD), of which Gentiloni is a member, on around 23 percent.
However, most seats in parliament are seen going to a conservative alliance, with Berlusconi's Forza Italia on around 16 percent and the right-wing Northern League and Brothers of Italy on 13 and 5 percent respectively.
The PD's support has been falling, hurt by banking scandals and internal splits, and there has been speculation that Gentiloni may take over from its leader Renzi as its candidate for prime minister at the election.
Gentiloni, whose popularity ratings are higher than Renzi's, refused to be drawn on this, but advised the PD to reject populism and run a sober campaign as "a tranquil party of government".
"This is the message the PD has to give, and if it does so I think it will regain support," he said.
Although the presidency is usually a mainly ceremonial role, President Sergio Mattarella is likely to become a central figure if the election produces no clear winner.
He is expected to ask the centre right to try to form a government if, as expected it is the largest coalition. But if it cannot muster a majority then the second chance may fall to the maverick 5-Star if it is still the largest party.
Its leader Luigi Di Maio said on Thursday he would work for a policy deal with other parties after the election, shifting away from the movement's previous refusal to form alliances.
(Editing by Alison Williams)