President Sergio Mattarella has refused to give his blessing to the coalition's government lineup because it includes 81-year-old Paolo Savona, a fierce critic of the euro, as economy and finance minister.
Either “the government starts to work in the coming hours, or it's better to hold new elections and take an absolute majority,” League chief Matteo Salvini, 45, said late on Saturday.
The far-right League and the anti-establishment Five Star Movement have failed to set up shop in Rome since scoring the most votes in Italy's inconclusive elections nearly three months ago.
Their pick for prime minister Giuseppe Conte, 53, won Mattarella's approval last week.
But the impasse over Savona has League chief Matteo Salvini digging in his heels, suggesting that a new election may be on the cards if the standoff continues.
Five Star leader Luigi Di Maio added: “Stay with us, we have people against us in the upper echelons, but so many who support us.”
According to the Italian press, Mattarella wants to avoid isolating Italy within the European Union.
Savona's hostility to the euro — he says it has halved Italians' purchasing power — has prompted a flurry of warnings from Brussels.
Mattarella also needs to protect the role of the president, which crucially includes appointing a prime minister and approving his or her cabinet.
The impasse appears unlikely to be resolved before financial markets reopen on Monday — after the Milan Stock Exchange closed down 1.54 percent on Friday.
The Italian head of state is now waiting for Conte to propose a fresh lineup. If it includes Savona, Mattarella is expected to confirm his refusal, which could prompt him to appoint a caretaker government until new elections
can be held.