Italy's president seeks way out of political deadlock
* Napolitano meets parties for consultations on Friday
* Centre-left bid to form government blocked
* Speculation grows that government could be led by outsider
ROME, March 29 (Reuters) - Italian President Giorgio Napolitano meets political leaders on Friday in a bid to break a month-old stalemate after an election left no party able to form a government.
Centre-left leader Pier Luigi Bersani, who won the biggest share of the vote in the February 25 vote but fell short of a majority, told Napolitano on Thursday he had failed to secure enough support from rival parties to form a government.
The 87-year-old Napolitano, whose own term ends in mid-May, said he would personally meet representatives from the main parties to assess what options remain to prevent an early return to the polls.
The deadlock in Italy, the euro zone's third largest economy, comes as the Cyprus banking crisis has revived fears of renewed financial market turmoil that could threaten the stability of the currency bloc.
After five days of talks, Bersani failed to secure a deal with either Berlusconi's centre-right bloc, the second-largest force in parliament, or ex-comic Beppe Grillo's 5-Star Movement, which holds the balance of power.
The centre-left leader rejected Berlusconi's demand that he be allowed to decide Napolitano's successor as head of state, and Grillo's populist group maintained its refusal to support a government led by any of the big parties it blames for Italy's social and economic crisis.
Napolitano's options now include appointing a figure from outside politics to lead a technocrat government like that of outgoing Prime Minister Mario Monti or a cross-party alliance backed by the big parties.
Among possible candidates are Fabrizio Saccomanni, the widely respected director general of the Bank of Italy, the head of the constitutional court Franco Gallo or former prime minister Giuliano Amato.
Napolitano meets representatives from former prime minister Silvio Berlusconi's People of Freedom (PDL) party at 1000 GMT, before seeing the anti-establishment 5-Star Movement and finally Bersani's Democratic Party (PD) in the evening.
The political gridlock has fed growing worries about Italy's ability to confront a prolonged economic crisis that has left it in deep recession for more than a year, with a 2-trillion-euro public debt and record unemployment, especially among the young.
Rumours have been circulating for days that ratings agency Moody's is preparing to cut its rating on Italy's sovereign debt, which is already only two notches above "junk" grade, partly due to the uncertain political outlook.
The immediate pressure from the bond markets has been taken off during the Easter break but failure to make progress in securing an agreement could lead to new turbulence next week after a steady rise in Italy's borrowing costs in recent days.
However the prospects appear slim of appointing the kind of government capable of turning around an economy that has been in decline for more than a decade, with deep-rooted problems ranging from corruption to suffocating bureaucracy.
Napolitano has made clear that he does not want Italy to go back to new elections immediately, not least because the widely criticised election law is likely to lead to a similar inconclusive result.
However even a so-called "president's government" led by a political outsider, would need the backing of parliament, which may be difficult to secure given the deep divisions which remain between the parties.
Many are turning their thoughts towards new elections, with Berlusconi's centre-right bloc confident that the momentum created by the 76-year-old billionaire's surge in the final weeks of the last election campaign will continue.
"We're not afraid of going back to vote," Daniela Santanche, one of Berlusconi's most faithful allies told the daily La Repubblica. "The opinion polls are telling us that we'd win and the PD would lose 150 deputies," she said.
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