UPDATE 2-Differences with centre-right delay Italy's Letta
* Centre-right wants agreement on economic priorities
* Berlusconi says government must help end recession, spur growth
* Letta says time has come for EU to soften austerity policies
ROME, April 25 (Reuters) - Italy's prime minister-designate Enrico Letta started "encouraging" talks on Thursday for a new government to end two months of political deadlock, but said significant differences with the centre-right would take more time to iron out.
Letta, the 46-year-old deputy head of the centre-left Democratic Party (PD), said he would use Friday as a "day to reflect" on his chances of piecing together a broad coalition to govern the euro zone's third-largest economy.
"I think we'll need many more hours because we're coming from a period of deep mutual opposition and the differences that still remain are very significant," he told reporters after a day of talks that included a two-hour meeting with officials from Silvio Berlusconi's People of Freedom (PDL) party.
"I was encouraged by everyone but that does not resolve the problems," he said.
President Giorgio Napolitano, who appointed Letta on Wednesday, is eager for him to form a broad coalition before financial markets open on Monday and seek confidence votes from parliament's two houses early next week, political sources say.
The PDL delegation told Letta he had to agree to economic priorities on growth and tax cuts to win their support.
"We are satisfied by how the meeting went but we are cautious because there are still issues that have to be resolved," PDL secretary Angelino Alfano said.
Alfano said the PDL was seeking Letta's backing for eight points on how to revive the economy, including tax breaks for companies that hire young people, cutting red tape and the abolition of a much-hated tax on primary residences.
Removing the tax and repaying contributions paid for 2012 was a key plank in the centre-right campaign before the inconclusive February elections, which gave the PD a majority in the lower house but not in the Senate. The PD says it is willing to reduce the tax but scrapping it would damage the budget.
Markets have reacted favourably to the prospect of an end to the political deadlock, with bond yields and the spread with comparable 10-year German bonds falling.
Letta is viewed as capable of governing by consensus. An opinion poll for Italian state television said he would enter office with a 43 percent approval rating.
The next government is expected include the PD, Silvio Berlusconi's PDL, as well as caretaker Prime Minister Mario Monti's centrist group, both of which have said they will support the government.
Letta is a moderate who speaks fluent English and at 46 would be one of Italy's youngest prime ministers, representing a generational change from the era of Berlusconi and Monti.
Berlusconi told an Italian television station it did not matter who headed the government as long as it enacted reforms.
"The important thing is that there is a government and that there is a parliament that can approve measures that we absolutely need to emerge from the crisis of recession and get back on the path of growth," Berlusconi said.
Accepting his mandate on Wednesday, Letta said Italy faced an untenable situation and the government must provide answers on jobs, poverty and the crisis facing small businesses in a recession that now matches the longest since World War II.
Letta said changing European policy to focus more on growth and less on austerity would be "one of my obsessions" if he took office.
5-STAR MOVEMENT, LEAGUE, CONFIRM OPPOSITION
Letta began the consultations at parliament early on Thursday morning with smaller groupings, including the Left Ecology and Freedom party, which reiterated that it would remain in opposition.
The anti-establishment 5-Star Movement, the largest group in the lower house Chamber of Deputies, has also said it would sit in the opposition, but would support specific reforms.
The Northern League, a former ally of Berlusconi's PDL, also reiterated that it would not join the government but said it would cooperate on some reforms.
Participants at Thursday's meetings said there were no specific requests about the distribution of ministerial posts, expected to be filled by technocrats and politicians.
Italian media have already begun speculating on how the posts might be carved up among politicians and technocrats.
The economy ministry could go either to Fabrizio Saccomanni, the Bank of Italy's director general, or Carlo Padoan, chief economist at the Organisation for Economic Cooperation and Development (OECD), according to Italian media.
Alfano has been tipped by some to become deputy prime minister, a choice that would placate Berlusconi but upset some on the left of the PD.
The industry and labour ministries could go to politicians and the foreign affairs portfolio to Monti or former Prime Minister Massimo D'Alema of the PD, local media speculated.
The PDL and PD had previously failed to reach a deal but Napolitano twisted their arms on Saturday when he was re-elected to an unprecedented second term and threatened to resign unless parties tried to find common ground to pull Italy out of its political rut and work on institutional reforms.
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