Italy avoids polls as parties form pact

New Italian PM Giuseppe Conte has met the president and his ministers will be sworn in on Friday

Italy's anti-establishment parties have revived coalition plans, ending three months of political turmoil by announcing a government that promises to increase spending, challenge European Union fiscal rules and crack down on immigration.

The coalition deal, following inconclusive elections in March, removes the risk of a repeat vote, a prospect that had sparked a big sell-off in Italian financial markets this week.

The leaders of the right-wing League and the 5-Star Movement patched up their alliance after agreeing to substitute a eurosceptic they had initially proposed as economy minister, a nomination that had been rejected by the head of state.

"All the conditions have been fulfilled for a political, 5-Star and League government," 5-Star chief Luigi Di Maio and League leader Matteo Salvini said in a joint statement on Thursday after several hours of talks.

Just a few hours later, their chosen prime minister, Giuseppe Conte, a little-known law professor who belongs to neither party and has not been elected, presented his list of ministers after receiving his second mandate in eight days.

"We will work with determination to improve the quality of life of all Italians," Conte, who is close to 5-Star, told reporters at the presidential palace after meeting head of state Sergio Mattarella.

His ministers will be sworn in on Friday before the government faces votes of confidence in both houses next week.

The deal followed an extraordinary few days in which Di Maio called for Mattarella to be impeached, Conte and another prime minister-designate were tasked to form a government and failed before Conte was reinstated on Thursday evening.

The breakthrough came after the League and 5-Star agreed to drop economist Paolo Savona as their choice for economy minister.

Savona, an 81-year-old economist, had said previously that Italy should have a contingency plan to abandon the euro.

He will be substituted by economics professor Giovanni Tria, another little-known figure.

Savona will be in government in the less-powerful role of European affairs minister.

No sooner had the coalition deal been announced than friction flared with Brussels over remarks by European Commission chief Jean-Claude Juncker about Italy's impoverished south.

Global financial markets have been recovering after tumbling on the spectre of repeat elections dominated by debate over Italy's future in the euro zone.

Italy, with debts totalling more than 130 per cent of its economic output, is the most heavily indebted euro zone nation after Greece and is often described as "too big to fail".

Though investors were relieved to avoid repeat elections, they are now likely to refocus on the big-spending plans of the League and 5-Star.

The coalition has also said they will push the European Union to review the bloc's fiscal rules, which Salvini says have "enslaved" Italians.