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UPDATE 3-Italy close to government deal as Conte meets party chiefs

Angelo Amante and Giselda Vagnoni

* Fate of Conte has been sticking point between parties

* PD chief says optimistic of deal with 5-Star

* Conte to meet PD, 5-Star chiefs at 19:00 GMT

* President gives parties Wednesday deadline (Updates with Zingaretti, League comments, Conte meeting)

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

Conte, who belongs to no party but is close to 5-Star, resigned last week after the collapse of a 14-month coalition between 5-Star and the far-right League, brought down when League leader Matteo Salvini pulled out.

President Sergio Mattarella has given 5-Star a chance to avert a snap election by forming a new coalition with the PD. Last week he told them to report back by Tuesday, but on Monday he extended the deadline by an extra day to Wednesday.

Conte returned to Rome from a G7 meeting in Biarritz, France, for a meeting with 5-Star leader Luigi Di Maio and PD chief Nicola Zingaretti, set for 19:00 GMT.

His reinstatement, insisted on by the anti-establishment 5-Star but previously 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 party's previous rejection of Conte, as he left a meeting of its top brass including leader Zingaretti.

The cost of borrowing for heavily indebted Italy has gyrated with political developments. Its 10-year bond yield hit the day's low and the spread with German Bunds fell below 200 basis points after Marcucci's comments.

5-Star chiefs gathered in a Rome apartment on Monday before Di Maio left to meet briefly with Zingaretti at the prime minister's office. Two PD sources told Reuters a deal looked imminent involving Conte's return as prime minister at the head of a PD/5-Star coalition.

"We are working to give Italy a new government ...I think we are on the right track. I am optimistic," Zingaretti told reporters after the meeting with Di Maio.

"We need to put together a (2020) budget which requires a new, serious and authoritative government," he added, declining to answer questions about Conte's role.

5-Star has been 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 a decline in voter support it has suffered over the last year.

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

League chief Salvini abandoned his coalition with 5-Star, hoping to capitalise on a surge in his anti-immigrant party's popularity in a new election. But the move has backfired with 5-Star and the PD seeking to form a new coalition instead, which would push the League into opposition.

Only the president can dissolve parliament, and he will do so only if parties are unable to form a new government. He has made clear that if the talks break down he will call an election for 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.

The League, fearing its bid for elections has failed and it will be sidelined, has tried to resurrect its coalition with 5-Star, and reacted angrily to growing signs of a 5-Star/PD deal.

"The people should rise up as quickly as possible," said the League's minister for families Alessandra Locatelli. "If necessary we will be the first to protest in the streets because we cannot afford another government that massacres the interests and the rights of Italians."

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 and writing by Gavin Jones Editing by Peter Graff)