Italy turns to former IMF official to be PM after fraught coalition collapses

Italy's president set the country on a path back to fresh elections on Monday, appointing a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and to pass the next budget.

The decision to appoint Carlo Cottarelli to form a stopgap administration sets the stage for elections that are likely to be fought over Italy's role in the European Union and the euro zone, a prospect that is rattling global financial markets.

"I'll present myself to parliament with a program which — if it wins the backing of parliament — would include the approval of the 2019 budget. Then parliament would be dissolved with elections at the beginning of 2019," Cottarelli said.

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The eurozone's third largest economy has been seeking a new government since inconclusive March elections, with anti-establishment forces Five Star and the League abandoning their efforts to form a ruling coalition at the weekend after a standoff with the president over their choice for economy minister.

Voters could be headed to the polls again in a matter of weeks.

"In the absence of confidence, the government would resign immediately and its main function would be the management of ordinary affairs until elections are held after the month of August," said Cottarelli.

President Sergio Mattarella had summoned Cottarelli to his office after rejecting 81-year-old euroskeptic economist Paolo Savona for economy minister, because he had threatened to pull Italy out of the euro zone.

"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," Mattarella said, adding: "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."

Angry reactions from Five Star, League

Financial markets tumbled last week on fears the Five Star-League coalition would unleash a spending splurge and dangerously ramp up Italy's already huge debt, which is equivalent to more than 1.3 times the nation's domestic output.

After the coalition's collapse, Italian bonds, stocks and the euro rallied.

The League and Five Star responded with fury to Mattarella's rejection, accusing him of abusing his office.

Five Star leader Luigi Di Maio called on parliament to impeach the mild-mannered Mattarella, while League chief Matteo Salvini threatened mass protests unless snap elections were called.

"If there's not the OK of Berlin, Paris or Brussels, a government cannot be formed in Italy. It's madness, and I ask the Italian people to stay close to us because I want to bring democracy back to this country," Salvini told reporters.

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While he had approved all their other ministerial picks, Mattarella said he had the right to block nominations that could harm the country. He added that the League and Five Star had refused to put forward any other name for the role.

On Monday, Salvini said in a radio interview he would seek parliamentary support from Five Star to change the electoral law. The current purely proportional system produced a hung parliament two months ago, and polls suggest it could happen again.

The League, which won 17 percent of the vote in March, would surge in any early ballot, polls show, while support for Five Star remained strong, above 30 percent.

Mainstream centre-left and centre-right parties were seen losing further ground in the face of voter anger over the sluggish economy, high unemployment and rising poverty

Demanding an immediate ballot, Salvini told followers on Facebook: "It won't be an election, it will be a referendum between Italy and those on the outside who want us to be a servile, enslaved nation on our knees."

However, Salvini dismissed calls on Monday by Five Star and a far-right ally, the Brothers of Italy, to chase Mattarella out of office.

The Five Star's Di Maio demanded impeachment under article 90 of the constitution. Under that clause, parliament can seek to remove a president if a simple majority of lawmakers votes in favour. The constitutional court would then be called to decide whether to enforce the decision

The centre-left Democratic Party (PD) and the centre-right Forza Italia party, led by controversial former PM Silvio Berlusconi, each denounced calls for impeachment.