Italy parties split as president seeks way out of stalemate
* Berlusconi demands share of government with centre-left
* Grillo's 5-Star Movement seeks mandate to govern
* Centre-left leader Bersani to meet head of state later on Thursday
ROME, March 21 (Reuters) - Italy's divided political parties remained far apart on Thursday as President Giorgio Napolitano tried to form a government after last month's deadlocked election left no group with a majority in parliament.
The election gave Democratic Party leader Pier Luigi Bersani's centre-left alliance with the leftist SEL party a majority in the lower house but not in the Senate, leaving it unable to govern without the support of other parties.
The stalemate has revived fears of a prolonged bout of instability in the euro zone's third largest economy just as as the crisis over bank deposits in Cyprus has revived fears of a return of financial market turmoil.
Former prime minister Silvio Berlusconi repeated his demand on Thursday that Bersani form a coalition with his conservative bloc and that Napolitano's successor as head of state should be from the centre-right. Napolitano's term ends on May 15.
That offer has already been firmly rejected by Bersani, who is due to meet Napolitano at 6.00 p.m. (1700 GMT) but Berlusconi said there was no alternative.
"There are two forces still in play, us and the Democratic Party, and at this moment the responsibility to give a government to the country lies with both of us," he told reporters after meeting Napolitano.
Berlusconi received some encouragement on Thursday from opinion polls showing the centre-right and centre-left neck and neck.
If no agreement can be struck, Italy faces the prospect of a brief period under a caretaker government before heading for new elections, possibly as early as June or after the summer holiday months, in September or October.
With the country in deep recession, record unemployment and a 2-trillion-euro debt pile that remains vulnerable to the kind of financial market crisis that struck in 2011, business leaders and European partners are deeply concerned at the stalemate.
Bersani has said he will present a limited programme of policies, focused on institutional reform, fighting corruption and creating jobs and seek the backing of parliament, even if he does not have any formal coalition agreement in advance.
For its part, Beppe Grillo's anti-establishment 5-Star Movement (MS5), which holds the balance of power in parliament, asked Napolitano for a mandate of its own, though it declined to say who it would present as prime minister.
The head of the 5-Star Senate group, Vito Crimi, said the party presented its platform of policies to Napolitano, including a referendum on Italy's future in the euro and measures on issues including tax and party finance reform.
Grillo made clear the movement would not support a coalition led by any other party.
"MS5 will not give any confidence vote to political or pseudo-technocrat governments," Grillo said on his blog.
He explicitly rejected one option, widely mooted in Italian newspapers, that the newly elected speaker of the Senate, former anti-mafia judge Pietro Grasso, could be asked to form a government.
Grasso is seen as a potential replacement for Bersani, whose position has been under threat ever since the election in which the centre-left threw away a 10 point lead. He said on Thursday that he was "ready to serve for the good of the country".
Italy's main banking association ABI said on Thursday that Italy had "two great interconnected emergencies" - an urgent need to reform its institutions, and an economy in need of reforms to cut debt and restart growth.
"We need an authoritative government that can operate efficiently on both," it said in a statement.
Underlining the problems facing any new administration, a government source said Prime Minister Mario Monti's caretaker government was considering raising the deficit target for 2013 above the current level of 1.8 percent of gross domestic product.