According to the Italian press, the Five Star Movement (M5S) and the anti-immigrantion League party have asked President Sergio Mattarella to give them until Monday to resolve the stalemate, failing which fresh elections could be held.
M5S leader Luigi Di Maio and League chief Matteo Salvini met at the lower house Chamber of Deputies on Thursday morning.
"Big steps were made towards the composition of the executive and the nomination of the prime minister," the pair said in a statement after the morning round of talks.
A question mark still hangs over who would clinch the top spot in a M5S-League coalition. Both Di Maio and Salvini have said they are willing to step back and let someone else take the premiership but, according to the press, neither has completely given up on their ambitions to lead the country.
Later on Thursday Salvini took to Twitter saying, "We are working for you," with a photo of him posing next to a giant bulldozer.
A beaming Di Maio said, "I cannot hide my joy that we can finally begin to take care of Italy's problems," in a Facebook video.
Meanwhile experts began to pour over the parties' key proposals in order to forge a government contract. Talks over policies will likely be complicated given the serious differences between the two parties – in particular regarding the M5S's flagship universal basic income policy, which the League has said will create a culture of dependency.
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Luigi Di Maio (L) and Matteo Salvini. Photo: Tiziana Fabi/AFP
A breakthrough in negotiations for the two parties came on Wednesday when Salvini's right-wing coalition partner, former prime minister Silvio Berlusconi, gave the green light for the pair to form a government without his Forza Italia party.
Salvini and Berlusconi's coalition won the most seats in the March election, but the 81-year-old ex-premier has been a sticking point in the ensuing horse-trading. Di Maio insisted Salvini dump the scandal-dogged media mogul Berlusconi and form a government with the M5S and without Forza Italia.
Late on Wednesday Berlusconi announced he would not block a possible coalition deal between the two parties. Between them they would have enough seats in both houses of parliament to form a majority.
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After three failed rounds of consultations hosted by President Sergio Mattarella, Italy had looked to be heading either for a caretaker government, chosen by the president, or fresh elections.
Both the League and Five 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.
"We still have to work on the programme, on dates, on the team and the things that need doing," Salvini said. "Either we reach a conclusion, or we return to the voters".