ROME (AFP) - Italian President Giorgio Napolitano prepared to unveil his nomination for prime minister on Wednesday to bring to an end a two-month deadlock on forming a new government that has stalled reforms and set off alarm bells around Europe.

The most likely choice according to analysts is Mr Giuliano Amato, a 74-year-old former prime minister and academic who has a political career stretching back to the early 1980s when he started out with the Italian Socialist Party.

Mr Amato has remained above the party political fray in recent years and is seen as one of the few figures who could lead a type of coalition government which is expected to include politicians from both the right and the left.

Other possibilities mentioned by analysts in recent days are the current interior minister Anna Maria Cancellieri, who would be the first female prime minister, and the 38-year-old leftist mayor of Florence, Mr Matteo Renzi, a rising star.

The eurozone's third largest economy has been mired in a bitter political crisis ever since a general election in which a centre-left coalition led by the Democratic Party came first but failed to win an overall parliamentary majority.

The Democratic Party (PD), which had previously ruled out an alliance with Silvio Berlusconi's People of Freedom party, is now saying it is open to any option suggested by the 87-year-old president.

"We respect the choice that the president of the republic will announce tomorrow," deputy leader Enrico Letta said after talks on Tuesday with Mr Napolitano, who has called for a grand coalition.

The idea of being in government with Mr Berlusconi's party is hugely controversial within the PD, reinforcing long-standing divisions that are now threatening to tear the leftists apart.

Mr Berlusconi said his party would "support as much as possible" whoever is nominated by the president to be the prime minister, adding that he wanted "not a temporary government but a lasting one".

The centrist Civic Choice group led by outgoing Prime Minister Mario Monti, a former European commissioner who replaced Mr Berlusconi in 2011, said it too would support Mr Napolitano's choice.

The combination of right, centre and left would mirror the loose alliance that backed Mr Monti's reform-oriented technocratic government until Mr Berlusconi pulled his party's support for it in December, precipitating early elections.

The PD has been badly divided since the inconclusive result of the February 24-25 polls and its entire leadership resigned on Friday after two of its presidential nominations failed to get voted because of a rebellion within party ranks.

Mr Napolitano was eventually re-elected to a second term on Saturday - the first Italian president to stay on - after the main political parties pleaded with him to resolve their differences.

At his swearing-in on Monday, Mr Napolitano accused the parties of being "deaf" to the calls for reform from ordinary Italians and of committing "mistakes, omissions and irresponsibility".

He threatened to resign if the parties continued their "fatal stalling" and said they should form a government "without delay" based on a realistic assessment of their strength in parliament.

The Five Star Movement, a new protest party that won a quarter of the vote and came third in the elections, said on Tuesday it had not agreed to join any government and would be in opposition.

Several smaller parties on both right and left also said they would stay out of the new cabinet.

Mr Monti's government remains in office until a new one is formed but it has only interim powers.

Business leaders, trade unionists and the Catholic Church have urged politicians to act quickly as a painful recession forces firms to shut down and leaves many Italians struggling to make ends meet.

Investors responded well to the imminent end to the deadlock, with stocks in Milan closing 2.93 per cent higher on Tuesday and borrowing costs falling to their lowest levels since 2010.