Wed Mar 20, 2013 6:41am EDT
* Consultations with parties due to run to Thursday
* No sign of end to stalemate after inconclusive election
* Prospect of early return to polls if no accord reached
By James Mackenzie
ROME, March 20 (Reuters) - Italian President Giorgio Napolitano began consultations with political leaders on Wednesday to try to find a way of forming a government after the deadlocked election last month which left no party with a majority in parliament.
Senate speaker Pietro Grasso said after meeting Napolitano the president was determined to reach an accord, saying there was "an absolute necessity to give the country a government".
Napolitano would take "all roads possible", he said.
Italy's political stalemate and the prospect of months of uncertainty has created alarm across Europe just as the standoff over bank deposits in Cyprus reawakened fears that the euro zone debt crisis could flare up again.
Centre-left leader Pier Luigi Bersani, who won a majority in the lower house but not in the Senate, commands the largest bloc in parliament but cannot govern unless he has support from one of the other parties.
However, there has been no sign that an accord is possible with either former Prime Minister Silvio Berlusconi's centre-right alliance, the second biggest force in parliament, or the anti-establishment 5-Star Movement led by ex-comic Beppe Grillo, which holds the balance of power.
If no agreement can be struck between parties that are bitterly divided, Italy faces the prospect of a brief period under a caretaker government followed by a return to the polls, possibly as early as June.
Napolitano also meets minor parties, including Prime Minister Mario Monti's centrist group on Wednesday before the main meetings on Thursday when he sees representatives from the 5-Star Movement, Berlusconi's People of Freedom (PDL) party and Bersani's Democratic Party (PD).
Bersani, 61, received a small boost at the weekend when his candidates were elected the speakers of the two houses of parliament, despite the centre left's lack of a majority in the upper house.
Both speakers announced late on Tuesday that they would take a 30 percent wage cut and urged other parliamentarians to do the same, a move that followed an example set by 5-Star members elected as local officials in Sicily last year who gave up most of their salaries and used the savings to fund small businesses.
LIMITED
Bersani is proposing to present a limited package of reforms aimed at fighting corruption and creating jobs that he hopes can be backed by the 5-Star Movement.
Given the fractious climate, the prospects of a minority government surviving more than a short time are slim but Bersani has little alternative.
"The PD is not changing our line, we'll go to the consultations with the proposals which were voted by the party leadership immediately after the election," he told reporters on Tuesday.
Italy, the euro zone's third-largest economy, can ill afford a prolonged political crisis after the turmoil which brought down Berlusconi's last government and dragged the single currency to the brink of disaster just 16 months ago.
Its economy is deep in recession, and unemployment is at record levels especially among the young. Its 2 trillion-euro ($2.6 trillion) public debt is dangerously vulnerable to bond market volatility and any sharp rise in interest rates.
However, far from prompting the parties to cooperate as they did when Monti's technocrat government took over from Berlusconi in 2011, the crisis appears to have deepened hostility.
Grillo, who has pledged not to give a vote of confidence to a government led by any other party, warned followers against falling into a "trap" after a handful of rebels voted with the centre left in the election of the Senate speaker on Saturday.
Berlusconi, fighting a tax fraud conviction and facing trial for paying for sex with a minor, has demanded that the centre right be allowed to name the next president when Napolitano's term ends on May 15, offering his support to a Bersani-led government in exchange.
That offer was rejected as "indecent" by the PD, prompting Berlusconi to pledge street protests if parliament appointed a centre-left head of state.
A rally organised by the PDL, called "All for Silvio!" is already planned for Saturday to protest against what his supporters say is a political campaign by magistrates against the 76-year-old billionaire.
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