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ROME (Reuters) - Italian prime minister-designate Enrico Letta could announce a new government on Saturday and spell out its programme early next week, political sources said on Friday, while outgoing premier Mario Monti said he did not expect to be a minister.
Letta, deputy leader of the centre-left Democratic Party, has been in discussions to iron out remaining differences with Silvio Berlusconi's People of Freedom (PDL) party following an initial round of talks on Thursday.
After two months of political stalemate following an inconclusive general election in February, Letta is under pressure to move quickly and form a government capable of leading Italy out of recession.
In a series of lengthy meetings, he conferred with President Giorgio Napolitano, Monti and PDL national co-ordinator Angelino Alfano.
Monti said in an evening television interview that he advised Letta not to put frontline politicians from any party in key cabinet posts in order to reduce potential tensions. He said this meant he himself would be excluded.
"I don't believe I will be in the cabinet and I have not requested to be," he told TV channel La7.
Several political sources close to Letta said he expected to announce his cabinet on Saturday and take Sunday to prepare an initial speech to parliament on Monday, which would be followed by confidence votes in the two houses of parliament.
The horse-trading around the formation of a new government represents a cooling of post-election hostilities and few politicians or commentators doubt the government will be formed.
Yet big problems remain, including securing the lasting support of Letta's own divided party and ensuring cohesion in a cabinet of long-time adversaries.
One potential stumbling block is the PDL's demand for the abolition and repayment of a housing tax introduced last year by Monti's technocrat government.
Scrapping the tax for 2013 and repaying last year's contribution would blow an 8 billion euro ($10.40 billion) hole in this year's budget plans and create further problems for medium-term finances in the years ahead.
In an interview with Italian newspapers on Friday, Berlusconi expressed optimism that a solution could be found but, in a sign that problems remained, politicians on both sides avoided public comment on how talks were progressing.
Letta has declared his chief priorities will be measures to create jobs and help small business and to reform ineffective political institutions, including an electoral law that was a leading cause of the deadlocked vote.
He has also joined a chorus of voices calling for a change to the European Union's austerity mantra to put more emphasis on economic growth and investment, a line that Berlusconi's PDL has also pushed strongly.
Letta's Democratic Party has come close to breaking apart after a mutiny last week over the election of the president of the republic which forced Pier Luigi Bersani to resign as party leader.
Many in the party refuse to accept any coalition with the scandal-plagued Berlusconi, their enemy for almost 20 years, who is appealing against a four-year sentence for tax fraud and fighting charges of paying for sex with a minor.
Younger party activists have protested loudly against any deal and there has already been speculation that some rebels may refuse to support Letta in confidence votes in parliament.
The anti-establishment 5-Star Movement, Berlusconi's former allies in the Northern League and the PD's own former allies in the leftist Left Ecology Freedom party have already declared they will not be in a government dominated by the PD and PDL.
The PDL insists that the government be made up mostly of politicians from the main parties rather than technocrats, putting it at odds with many in Letta's party.
Berlusconi pressed for Renato Brunetta, a combative former economics professor who is currently the PDL's lower house leader, to be given the economy ministry, ruling out Bank of Italy official Fabrizio Saccomanni, who had been mooted.
Other possible candidates include former prime minister Giuliano Amato, while either Monti or former prime minister Massimo D'Alema have been considered possible foreign ministers.
Berlusconi claimed a role in a group deciding institutional reforms and urged a transformation of the electoral system to include a directly elected head of state along the lines of the French model.
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Writing by James Mackenzie; Editing by Angus MacSwan and Tom Pfeiffer