UPDATE 3-Italian president seeks way out of political stalemate
* Consultations with parties to conclude on Thursday
* No sign of end to gridlock after inconclusive election
* Prospect of early return to polls if no accord reached
ROME, March 20 (Reuters) - Italian President Giorgio Napolitano completed a first day of consultations with political leaders on Wednesday to try to find a way of forming a government after the deadlocked election last month left no party with a majority in parliament.
Napolitano was due to meet the largest parties on Thursday.
Italy's political stalemate and the prospect of months of uncertainty has created alarm across Europe just as the standoff over bank deposits in Cyprus reawakened fears that the euro zone debt crisis could flare up again.
The most influential of the relatively minor groups that Napolitano met on Wednesday were the centrist Civic Choice led by outgoing Prime Minister Mario Monti and the leftist SEL party led by Nichi Vendola, part of the centre-left bloc.
Monti did not attend, but Civic Choice co-ordinator Andrea Olivero said after the meeting that the party favoured a pro-Europe, coalition government that could fix public finances and boost growth. He did not suggest a candidate for prime minister or even name the parties that should form such a coalition.
SEL leader Nichi Vendola was more forthcoming.
"We told Napolitano that Italy needs the most innovative and courageous government possible, now it's up to Bersani to try," he said, referring to centre-left leader Pier Luigi Bersani.
Bersani, who won a majority in the lower house but not in the Senate, commands the largest bloc in parliament but cannot govern unless he has support from one of the other parties.
However, there has been no sign that an accord is possible with either former Prime Minister Silvio Berlusconi's centre-right alliance, the second biggest force in parliament, or the anti-establishment 5-Star Movement led by former comic Beppe Grillo, which holds the balance of power.
Napolitano was due to meet Grillo at 0830 GMT on Thursday and Berlusconi and his Northern League allies an hour later. He ends the two days of talks when he meets Bersani at 1700.
Later on Thursday or on Friday he may ask Bersani, leader of the largest centre-left party, to try to form a government.
RETURN TO POLLS?
If no agreement can be struck, Italy faces the prospect of a brief period under a caretaker government followed by a return to the polls, possibly as early as June or after the summer holiday months, in September or October.
Berlusconi said on Wednesday only a broad cross-party alliance was capable of addressing the problems facing Italy but his overtures have been rejected by Bersani.
"We have declared ourselves open to this but Bersani and his supporters keep stubbornly paying court to Grillo and the 'Grillini' even though they only keep getting rebuffed," the media billionaire told his own Italia 1 television.
Bersani, 61, leader of the Democratic Party (PD), received a small boost at the weekend when his candidates were elected the speakers of the two houses of parliament, despite the centre left's lack of a Senate majority.
He is proposing to present at the Napolitano consultations a limited package of reforms aimed at fighting corruption and creating jobs that he hopes can be backed by Grillo's party.
Given the fractious climate, the prospects of a minority government surviving more than a short time are slim but Bersani has little alternative.
"The PD is not changing our line, we'll go to the consultations with the proposals which were voted by the party leadership immediately after the election," he told reporters on Tuesday.
Italy, the euro zone's third-largest economy, can ill afford a prolonged political crisis after the turmoil which brought down Berlusconi's last government and dragged the single currency to the brink of disaster just 16 months ago.
Its economy is deep in recession, and unemployment is at record levels especially among the young. Its 2 trillion-euro ($2.6 trillion) public debt is dangerously vulnerable to bond market volatility and any sharp rise in interest rates.
"Clearly, given the situation we have in Italy right now, in my view, it is obvious that there is a significant risk to the world economy from a return to a situation of political uncertainty," Swedish Finance Minister Anders Borg said.
However, far from prompting the parties to cooperate as they did when Monti's technocrat government took over from Berlusconi in 2011, the crisis appears to have deepened hostility.
Grillo, who has pledged not to give a vote of confidence to a government led by any other party other than his own, warned followers against falling into a "trap" after a handful of rebels voted with the centre left in the election of the Senate speaker on Saturday.
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