Italy president tells Monti to stay until new government formed
* Napolitano says Monti needed to ensure political stability
* No sign of end to deadlock, parties wrangle in parliament
* Threat of new elections if no breakthrough reached
ROME, March 16 (Reuters) - Italian President Giorgio Napolitano told Prime Minister Mario Monti on Saturday he would need to stay on as long as political parties fail to reach an accord that would allow a new government to be established after a deadlocked election.
Italy has been mired in political stalemate since the February vote that saw the centre-left alliance of Pier Luigi Bersani secure a majority in the lower house but fail to win the numbers to control the Senate as well and form a government.
"It is important that in Europe, and in the exercise of whatever initiatives are possible and needed especially for the economy and jobs, the government remains under the authoritative leadership of Mario Monti until a new government is formed," Napolitano said in a statement.
With memories still fresh of the financial crisis that brought Monti to power in 2011, the impasse has aroused fears that bond markets could take fright, reigniting the turmoil and endangering the government's ability to manage Italy's 2-trillion-euro public debt pile.
Parliament sat for the first time on Friday and was expected to complete the elaborate process of electing new speakers on Saturday. But the parties have remained far apart, with no sign of any readiness to work together and strike a deal.
Napolitano said he would begin consultations with party leaders on Wednesday to see if there is any chance that any of them can muster enough support to form a workable majority in parliament.
Saturday's statement, which followed a meeting with Monti on Friday evening, ends speculation that the former European Commissioner could leave government and take over the influential position as speaker of the Senate as part of a wider deal with the centre-left.
Italian newspapers reported that the decision was made over the objections of Monti, who had hoped to take the Senate helm, the second highest office of state after the president.
Even by the byzantine standards of Italian politics, the situation is unusually complicated but if the parties cannot cooperate to find a way out of the stalemate, Italy faces the prospect of a return to the ballot box within a few months.
Bersani's attempts to reach an agreement with Beppe Grillo's anti-establishment 5-Star Movement - which holds the balance of power in parliament - have been rebuffed and he has ruled out any deal with former prime minister Silvio Berlusconi, whose centre-right alliance makes up the second strongest bloc.
The election of the lower house and Senate speakers, who play a central role in setting the parliamentary agenda, was the first concrete test of whether any breakthrough was possible.
However, the complex process, involving repeated rounds of voting that allow the parties to sound out each other's intentions, instead made clear how wide the divisions remain.
Bersani had been prepared to offer the 5-Star Movement the position of lower house speaker in exchange for a broader agreement that would allow the centre-left to form a government but Grillo made clear very quickly that he was not interested.
The centre-left has the numbers to impose its own choice in the lower house and could also win in the Senate, depending on the results of a run-off ballot. But the inability so far to forge an agreement has underlined the stalemate that will face Napolitano when he begins consultations on Wednesday.
Berlusconi's own position has been made more difficult by trials on charges of tax fraud and paying for sex with a minor. He also faces an investigation into allegations he bribed a former Senator to change sides in 2006 to help bring down the last centre-left government.
The trials have sparked furious accusations by Berlusconi's People of Freedom (PDL) party, which says politically motivated prosecutors are trying to destroy him. PDL members staged a demonstration on the steps of the Milan courthouse this week.
On Saturday, judges ruled that a hearing in the tax fraud trial related to Berlusconi's Mediaset broadcasting empire could be delayed until March 23 due to the eye problems which kept the 76-year-old media magnate in hospital all week.