ROME Italian prime minister-designate Enrico Letta could announce a new government on Saturday and go before parliament to spell out its programme early next week, political sources said on Friday.
Letta, deputy leader of the centre-left Democratic Party, has been in discussions to iron out remaining differences with Silvio Berlusconi's People of Freedom (PDL) party following an initial round of talks on Thursday.
After two months of political stalemate following an inconclusive general election in February, Letta is under pressure to move quickly and form a government capable of leading Italy out of recession.
He met both President Giorgio Napolitano and outgoing Prime Minister Mario Monti on Friday but is unlikely to announce any government until Saturday, several people close to Letta said.
They said he would take Sunday to prepare an initial speech to parliament on Monday, which would be followed by confidence votes in the two houses of parliament.
Among the big issues remaining to be dealt with is the PDL's demand for the abolition and repayment of the IMU housing tax introduced last year by the technocrat government of outgoing Prime Minister Mario Monti.
Scrapping the tax for 2013 and repaying last year's contribution would blow an 8 billion euro (6.72 billion pounds) hole in this year's budget plans and create further problems for medium-term finances in the years ahead.
However in an interview with Italian newspapers, Berlusconi expressed optimism that a solution could be found
"I think things are coming into place well," he told La Stampa.
Letta has declared his chief priorities will be measures to create jobs and help small business and to reform ineffective political institutions, including an electoral law that was a leading cause of the deadlocked vote.
He has also joined the chorus of voices calling for a change to the European Union's austerity mantra to put more emphasis on economic growth and investment, a line that Berlusconi's PDL has also pushed strongly.
Behind the policy issues, the appointment of ministers will be a main point of discussion, with the PDL insisting that the government be made up mostly of politicians from the main parties rather than technocrats.
Berlusconi pressed for Renato Brunetta, a combative former economics professor who is currently the PDL's lower house leader, to be given the economy ministry, ruling out Bank of Italy official Fabrizio Saccomanni, who had been mooted.
Other possible candidates include former prime minister Giuliano Amato, while either Monti or former prime minister Massimo D'Alema are considered possible foreign ministers.
For himself, Berlusconi claimed a role in a group deciding institutional reforms and urged a transformation of the electoral system to include a directly elected head of state along the lines of the French model.
The horse-trading around the formation of a new government represents a cooling off after the hostilities of the post-election period but big problems remain, including securing the support of Letta's own divided party.
The Democratic Party has come close to breaking apart following last week's mutiny over the election of the president of the republic which forced Pier Luigi Bersani to resign as party leader.
Many in the party refuse to accept any coalition accord with the scandal-plagued Berlusconi, their enemy for almost 20 years, who is appealing against a four-year sentence for tax fraud and fighting charges of paying for sex with a minor.
Younger party activists have protested loudly against any deal and already there has been speculation that some rebels may refuse to support Letta in confidence votes in parliament.
The anti-establishment 5-Star Movement, Berlusconi's former allies in the Northern League and the PD's own former allies in the leftist Left Ecology Freedom party have already declared they will not be in a government dominated by the PD and PDL.
(Writing by James Mackenzie; Editing by Angus MacSwan)