Italian party asks for more time to form govt.

M5S unveils programme for Italy's'government of change

Brussels calls on Italy to stay committed to the 'European path'

According to a current draft agenda viewed by Reuters, the two sides would embark on policies that would breach European Union rules on fiscal discipline: cutting taxes, increasing welfare payments for the poor and scrapping an unpopular pension reform.

So far, market reaction has been muted in response to what some analysts described before the election as the "nightmare scenario" of a 5-Star/League government.

"The more they insult us, the more they threaten us, the more they blackmail us, the more desire I have to embark on this challenge", he said.

"In short, trust towards Italy is bound to face heavy tests under a M5S/LN government, even if the two parties will not be able to implement their program in full", he said. There was still no word on the thorny issue of who would be prime minister.

Di Maio said earlier in that all outstanding matters had been settled in talks with Matteo Salvini, the leader of the nationalist and eurosceptic League although the issue of their joint prime ministerial candidate was still being debated.

A 40-page version of the document, from Tuesday evening, was leaked to daily Il Fatto Quotidiano on Wednesday night.

Italian newspaper il Giornale - otherwise highly supportive of Salvini's populist Lega party - declared the delay the work of amateurs, noting that new discussions could add days more onto Italy being without a functioning government.

The prospect of the first populist government in a founding member will send tremors through a European Union that scraped through the euro-area debt crisis and found fragile unity after the shock of Brexit, only to be confronted with multiple challenges by US President Donald Trump. Italy's 10-year bond yield climbed almost 19 basis points to 2.13 percent and that was its highest level since early March and the biggest one-day rise since March 2017.

Besides the differences on migrant policy, Salvini also cited the League's promise to reform Italy's slow-moving justice system. The League has pledged to introduce a flat tax rate of 15 per cent, which would lower tax revenues by some 80 billion euros ($95 billion) per year, according to some estimates, while 5-Star has pledged new welfare payments for the poor costed at 17 billion euros. Plans to leave the euro appear to have been dropped while the latest accord could see them instead seek a "debt discount".

Italy's debt mountain totals more than 130 percent of national output is the highest in the eurozone after Greece. The bloc's budget rules require it to cut the debt pile aggressively under the "fiscal compact", which both parties want scrapped.

The gap over benchmark German Bund yields widened to 148 bps, its widest since the day after Italy's March 4 election. The spread is a "cynical board game of high finance", he said.

News of the draft accord has caused concern in Brussels, where European Commission vice president Valdis Dombrovskis told the EU parliament that Italy's new government should stick to fiscal discipline and keep reducing public debt.

Former PM Mario Monti discusses the governing plan by Italy's populist coalition and its impact on markets.

Both leaders said the final policy document would be put to their voters before being submitted to the president, Sergio Mattarella, who has the final say on the contract, prime minister and cabinet lineup. Both groups have a history of euroscepticism.

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