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Italy government deal closer as PD drops veto on Conte return as PM

Angelo Amante

* Fate of Conte had been sticking point between parties

* 5-Star meeting to decide response

* President gives parties Wednesday deadline (Adds president, new meetings, League comment, changes slug)

ROME, Aug 26 (Reuters) - A deal on forming a government in Italy between the 5-Star Movement and the opposition Democratic Party (PD) looked closer on Monday after the PD indicated it had dropped a veto on Giuseppe Conte serving another term as prime minister.

Conte, who belongs to neither party but is close to 5-Star, resigned last week.

His reinstatement, insisted on by the anti-establishment 5-Star but resisted by the centre-left PD, had been presented as the main stumbling block to a deal between the two traditionally antagonistic parties.

"There are no vetoes, we want to talk about policies," the PD's Senate leader Andrea Marcucci told reporters asking him about the block on Conte, as he left a meeting of the party's top brass including leader Nicola Zingaretti.

Italy's 10-year bond yield hit the day's low of 1.323% and the spread with German Bunds fell below 200 basis points on the comments.

Leaders of 5-Star were meeting in an apartment in central Rome to decide on their response.

The movement is divided between factions who favour a deal with the PD and others who believe it would shatter the party's anti-establishment image and accelerate the decline in voter support it has suffered over the last year.

5-Star leader Luigi Di Maio then left the meeting with his party officials to head to an encounter with PD chief Zingaretti at the prime minister's office a few blocks away.

Conte quit last week after the far-right League party, aiming to capitalise on its surging support in polls, declared its 14-month coalition with 5-Star was dead and asked for a snap national election.

Conte was a virtually unknown lawyer when he was chosen by the League and 5-Star to lead their government following an inconclusive March 2018 election. He is now Italy's most popular politician, according to opinion polls.

PRESIDENT'S MEETINGS

The move to sink the government by League chief Matteo Salvini has not gone to plan, as 5-Star and the PD have moved to try to form an alliance of their own, pushing the League into opposition.

Only the head of state, Sergio Mattarella, can dissolve parliament and he will do so only if parties are unable to reach an accord on forming a new government whose first priority would be to approve a 2020 budget.

On Monday, Mattarella gave the PD and 5-Star a little more time to clinch a possible deal, telling them to report to him back on Wednesday, rather than the Tuesday deadline he had set last week.

He has made clear that if the talks break down he will call an early election in the autumn.

Mattarella will meet with minor parties at his palace on Tuesday, before hearing the PD on Wednesday at 1400 GMT and closing his consultations with 5-Star at 1700 GMT.

On Friday, 5-Star and the PD made early progress in finding common ground on policy, but the former had insisted Conte should serve another term while the PD said it wanted someone else, without publicly putting forward a name.

5-Star's dilemma is deepened by the fact the League, fearing its bid for elections has failed and it will be sidelined, is now trying to resurrect its coalition with 5-Star and even hinting 5-Star leader Luigi Di Maio could be premier.

"A lot of Italians continue to believe we can get back with 5-Star and I believe we can," the League's Agriculture Minister Gian Marco Centinaio said on Monday, adding that the League was "willing to talk" about Di Maio taking the top job.

Opinion polls suggest the League has lost between 5 and 7 percentage points since pulling the plug on the government though it remains easily the most popular party, followed by the PD and 5-Star. (Additional reporting by Angelo Amante and Giselda Vagnoni, writing by Gavin Jones)

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