Italy is moving closer towards a populist, anti-Europe government after the leaders of the 5-Star Movement and The League said they have taken "big steps" towards forming a new administration.
According to the Italian press, the two parties have asked President Sergio Mattarella to give them until Monday to resolve the stalemate, failing which fresh elections could be held.
If they are successful in forming a government, this could spark renewed fears over the fate of the European Union after Brexit as both parties are staunchly eurosceptic.
"It would be a challenging scenario for the EU," Luigi Ferrata, public affairs account director at Community Group, told The National. "The League is committed to abandoning the euro, and both parties blame Brussels for the migrant crisis and for its austerity policies which have caused Italy economic pain."
However, Mr Ferrata added that if such a coalition is agreed, the president is likely to insist that the parties choose a more moderate third-party candidate as prime minister rather than allowing either the 5-Star or The League leader to take full control.
The breakthrough came days after Mr Mattarella indicated that, given the rounds of fruitless consultations, he would form a "neutral government" - something both parties are determined to avoid.
Neither won enough to govern alone in the inconclusive March 4 elections that created a hung parliament.
League leader Matteo Salvini, who heads a centre-right bloc, and 5-Star leader Luigi Di Maio met at the lower house Chamber of Deputies on Thursday.
"Big steps were made towards the composition of the executive and the nomination of the prime minister," the pair said in a joint statement after the talks.
So far, the two parties have been stymied in reaching a coalition deal largely over the role of former premier Silvio Berlusconi in any government.
Mr Di Maio has steadfastly refused any government including Mr Berlusconi, who is ineligible for public office due to a tax fraud conviction and has a long history of legal battles over his business and private life, while Mr Salvini refused to break up the centre-right coalition that includes Mr Berlusconi's party.
Mr Berlusconi on Wednesday, however, said he would not veto any decision by Mr Salvini to form a government with 5-Star, even if his Forza Italia will not support it in a vote of confidence in the parliament. Mr Berlusconi said that his party would support any measures taken by the new government that are in line with the centre-right programme "and that we consider useful for Italians".
Talks over policies will likely be complicated given the serious differences between the two parties - in particular regarding 5-Star’s flagship universal basic income policy, which The League has said will create a culture of dependency.
After three failed rounds of consultations hosted by Mr Mattarella, Italy had looked to be heading either for a caretaker government, chosen by the president, or fresh elections.
Both The League and 5-Star are staunchly opposed to a caretaker government and without their support the initiative would not pass a confidence vote in parliament.
The alternative could be fresh elections as early as July.
"Either we reach a conclusion, or we return to the voters," Mr Salvini said.