The parties have been trying to create a new workable coalition following the collapse of the country's populist government, despite having been bitter enemies until just a few weeks ago.
Italy's President Sergio Mattarella had on Monday allowed an extra day for negotiations, interpreted by some as a hopeful sign that a deal may be in the works.
The Democratic Party (PD) appeared to drop an earlier veto on outgoing Prime Minister Giuseppe Conte — the pick of the Five Star Movement (M5S) — leading any new coalition.
But on Monday the M5S issued a sharp statement accusing the PD of refusing to play ball on Conte and said talks were at a standstill until the centre-left changed its attitude.
“Yesterday, after four hours of talks, nothing was achieved,” it said. “We cannot work like this any more. Either the attitude changes or it's difficult [to see a deal being forged].”
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The M5S said it would “see the PD again when the party has given its OK to the reappointment of Conte”. It accused the centre-left party of having “confused ideas” and tartly reminded it that M5S held more seats in parliament.
The M5S, co-founded by a comedian, won a party record of 32 percent at elections in 2018, though its popularity has since sunk, according to opinion polls.
The political crisis was triggered on August 8th when Matteo Salvini withdrew his hard-right League party from the governing coalition with M5S and called for a snap elections, looking to capitalise on the party surging in polls.
Conte resigned, although Mattarella has asked him to stay on as caretaker prime minister for now.
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Ex-prime minister Giuseppe Conte, who resigned earlier this month. Photo: Andrea Solaro/AFP
The PD was initially unwilling to have M5S-ally Conte serve another term, preferring a complete shake-up of the cabinet. It has criticised Conte for having accepted the anti-migrant dictates of Salvini, the coalition's hardline interior minister.
But sources in the PD were quoted by Italian media as saying the problem actually lay with M5S leader Luigi Di Maio, who was demanding he be given both the deputy prime minister and interior minister postings in a new coalition.
“The government deal risks falling apart because of Di Maio's personal ambitions,” the PD's Andrea Marcucci said.
Mattarella has said that any new coalition must have an agreed platform that can pass parliament, after months of political clashes between M5S and the League over several high profile policies.
All of Italy's main parties have been summoned to report back to Mattarella on Wednesday.
If the PD and M5S cannot come to a deal and form a solid majority, the president is expected to call an early election for November.
The clock is ticking to ease the political turmoil, with Italy under pressure to approve a budget in the next few months. If it fails it could face an automatic rise in value-added tax that would hit the least well-off families the hardest and could plunge the eurozone's third largest economy into recession.
The Milan stock market was up over 1.0 percent after the M5S statement, suggesting investors still had hopes of a deal.
“Italian markets appear to be outperforming as optimism grows that new elections might be avoided,” said Michael Hewson, chief market analyst at CMC Markets UK.