UPDATE 3-New Italian government seen within days
* Monti seen getting job as early as weekend
* Politicians scramble to ward off crisis
* Bond yields ease on hope of solution
By Paolo Biondi and Barry Moody
ROME, Nov 10 (Reuters) - Respected former European Commissioner Mario Monti looked set on Thursday to be appointed within days to head an emergency Italian government, as politicians rushed to combat a crisis threatening the entire euro zone.
Political sources said Monti could be appointed to replace Prime Minister Silvio Berlusconi by Sunday and would then in short order form a unity government comprised of politicians and technocrats to push through a tough austerity programme.
Dithering politicians seemed finally to have been galvanised into action after Italy's borrowing costs soared way above sustainable levels on Wednesday, and earlier opposition to Monti among ruling politicians was evaporating as they scrambled to end uncertainty stoking the crisis.
Even Berlusconi, whose insistence on early elections after he steps down had fuelled Wednesday's disastrous day on bond markets, has been persuaded it would be better not to go to the polls now, sources in his ruling PDL party said.
The timetable imposed by an alarmed President Giorgio Napolitano could see a broad-based government as early as Sunday night or Monday following Berlusconi's resignation at the weekend, ending the flamboyant media magnate's 17-years of political dominance.
Organisers of a conference in the Netherlands at the weekend said Monti had pulled out at the request of Napolitano and a political source in Rome said he would meet the president on Thursday night.
Monti, 68, who is highly respected internationally, has been pushed by markets for weeks as the most suitable figure to lead a new government. The sources estimated he had a 90 percent chance of being appointed.
Italy managed to sell 5 billion euros ($6.8 billion) of one-year bonds on Thursday, but had to pay a whopping 6.087 percent interest rate, the highest in 14 years. Nevertheless the successful auction and prospects of a rapid solution to the political stalemate appeared to calm markets.
The spread on interest rates between Italian 10-year bonds and German bunds eased to 520 basis points, still in dangerous territory but significantly below Wednesday's record of 576. Yields dropped below the red line of 7 percent, after reaching more than 7.6 percent on Wednesday.
Both houses of parliament are expected to pass a financial stability law incorporating economic reforms demanded by the European Union and IMF by Saturday or Sunday. This will trigger Berlusconi's resignation as agreed with Napolitano on Tuesday.
NEW SENSE OF URGENCY
Before the new sense of urgency this process was expected to take at least a week. Napolitano could then hold formal consultations with political parties in a few hours instead of the usual days or weeks and appoint Monti by Sunday or Monday.
The sources said there were still arguments about the line-up of ministers in the new government but it would likely be a mix of centrist politicians and technocrats.
Under current plans, the government would implement reforms to liberalise Italy's economy, stimulate growth and cut its huge debt before elections early next summer. The inclusion of elections in the plan is intended to win the support of politicians who oppose an unelected government.
The new administration is expected to be supported by a large part of Berlusconi's PDL party, centrists and the biggest opposition force, the Democratic Party, the sources said.
However, they cautioned that the government was not a done deal and the situation could change by the hour. Berlusconi's chief coalition partner, the populist Northern League, said it would not back Monti.
The party, which is split internally, has also resisted a key reform on pensions. It may have made a calculation that it would benefit from a period in opposition to redress a sharp loss of popularity from its association with Berlusconi.
Angelino Alfano, secretary of Berlusconi's PDL, said the party preferred elections but would make a final decision after meeting Napolitano. The sources suggested this was a holding position while the party overcame internal divisions.
Napolitano appointed Monti a senator for life on Wednesday, in a move widely seen as a sign he would ask the academic to try to form a government.
Commentators said this effectively made Monti a bona fide politician rather than an outsider, with Napolitano sensitive to accusations that a technocrat government would be undemocratic.
IMF head Christine Lagarde added her voice to calls for an end to the impasse, saying that lack of political clarity in Italy was fuelling uncertainty in the markets. British Prime Minister David Cameron said Rome presented a "clear and present danger" to the euro zone.
In a highly unusual step, the sober business daily Il Sole 24 Ore carried a huge banner headline on Thursday reading: "Hurry Up", in a call to Italy's political class to forget their own interests and save the country.
Business and banking associations have repeatedly called for a unity government of the kind that has been successful at times of crisis in Italy in the past.
Monti, a respected economist who is currently head of Milan's prestigious Bocconi university, is a tough negotiator with a record of taking on powerful corporate interests as European Competition Commissioner.
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