Italian President Sergio Mattarella asked economist Carlo Cottarelli to form a government with new elections due as early as the fall, as populist leaders railed against the president and the European Union for blocking their
bid for power.
Mr Cottarelli, 63, a former executive director of the International Monetary Fund, pledged Italy would stay in the
euro and called for "a constructive dialogue" with the EU, in comments to reporters Monday.
"The president has asked me to go before parliament with a program that will bring the country to new elections," he said.
The former IMF official said that he would plan for general elections after August if his government loses parliamentary
votes of confidence, or in early 2019 if it wins the ballots in the lower house and in the Senate.
The choice of Mr Cottarelli, known for his strict approach to state finances, is set to further inflame Italy's bitter political divisions after populist leaders slammed the president for the collapse of their planned government and sought to extend the blame to the European Union.
Markets gave up earlier gains as the Five Star Movement and the League raged against Mattarella, suggesting months of acrimonious political campaigning ahead. The populists said Mr Mattarella gave in to pressures from investors and countries such as Germany when he decided to veto their decision to appoint the euroskeptic economist Paolo Savona as finance minister.
Both the anti-establishment Five Star and the anti- immigrant League rejected Mr Cottarelli even before he was given a
mandate. Five Star said it was considering proposing Mr Mattarella's impeachment, while the League's Matteo Salvini
called for elections "as soon as possible."
The president chose EU rules over the votes of Italians and that's "an issue for democracy," Mr Salvini said in a message on Facebook. Either EU rules change or it makes no sense for Italy to remain a member of the bloc, he said.
Italian banks led European financial stocks lower as the growing likelihood of new elections shook investor confidence.
Banca Monte dei Paschi di Siena, the habitually-volatile state-rescued bank, led declines with a drop of as much
as 7.8 per cent. The eight worst performers on the Bloomberg Europe Banks Index were all Italian lenders as of 12:07 p.m., with UniCredit losing almost 4 per cent and Intesa Sanpaolo down about 3 per cent.
At least a part of the pressure on equities came from the bond market. The yield on Italy's benchmark 10-year sovereign bonds surged again on Monday to over 2.60 per cent, its highest in nearly four years.
Populist leaders of the Five Star Movement and League party pulled the plug on their attempt to form a government Sunday after Mr Mattarella rejected the choice of a euro-skeptic, Germany-bashing candidate as finance minister.
Mr Mattarella on Monday nominated Cottarelli, the head of a broad review into Italy's government spending, as prime minister-designate to form a proposed government. However, his proposal is almost certain to be rejected by parliament, leading to a new vote as soon as September.
The political situation is "clearly unfavorable" to the rebound of Italian lenders as well as to banks exposed to Italy,
such as France's BNP Paribas and Credit Agricole, Natixis said in a note on Monday. Despite "solid fundamentals" BNP, Agricole, UniCredit and Intesa will all see continued pressure, the brokerage said. The financials index was down 0.8 per cent, taking the decline for this year to 7.3 per cent.
Asked if he would ally himself with Five Star in a new election campaign, Mr Salvini told reporters he was "still too
angry" to discuss this. Salvini's League fought the last campaign as part of a center-right alliance, with ex-premier
Silvio Berlusconi's Forza Italia party as his main partner.
Mr Berlusconi, 81, could now run for office after a Milan court earlier this month lifted a ban imposed following a 2013 tax-fraud conviction.
The euro initially rallied against the dollar at the end of a day of drama on Sunday that saw the prospect of a populist
government determined to take on Europe recede for now. It later gave up those gains to trade little changed as of 1:26 p.m. in Rome. The spread between Italian and German 10-year bonds reached the widest in over four years as polls suggest the populists can only benefit from the chaos.
Nicknamed "Mr Scissors" for his strict approach to state finances, Mr Cottarelli refused the official car he was entitled to
when he was appointed commissioner for a review of public spending in 2013 under then-premier Enrico Letta. He has headed the Observatory on Italian Public Accounts at Milan's Catholic University since October.