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UPDATE 2-Italy swears in new coalition, seen bolstering EU ties

Crispian Balmer and Giuseppe Fonte

* Coalition will seek constructive EU relations

* Former premier Gentiloni set to be EU commissioner

* Govt needs to win confidence votes in parliament

* Drafting 2020 budget the initial priority (Adds Gentiloni confirmed as commissioner, Franceschini quote)

ROME, Sept 5 (Reuters) - A new Italian government was sworn into office on Thursday, with the pro-European Democratic Party (PD) flanking the anti-establishment 5-Star Movement in an unlikely alliance that has been cheered on by financial markets.

The administration looks certain to seek a much less conflictual relationship with the European Union than the previous coalition comprising 5-Star and the far-right League, which constantly railed against EU budget and migration rules.

The PD has taken charge of the economy ministry and the European affairs ministry while former PD prime minister Paolo Gentiloni was named as Italy's next EU commissioner -- appointments that should guarantee smooth ties with Brussels.

The prospect has cheered investors and Italian bonds have rallied strongly over the past week, with 10-year yields touching a new record low of 0.803% on Wednesday. They were above 1.5% at the start of August.

Prime Minister Giuseppe Conte, a law professor with no party affiliation, led his new team of seven women and 14 men in the swearing-in ceremony in the gilded presidential palace.

Italy's 67th government since World War Two contains few political heavyweights, with an emphasis more on youth than experience.

"We know very well that the parties which make up this coalition have had major clashes over the years. It is a difficult road ahead, but what matters is the spirit," said Dario Franceschini, a PD stalwart and the new culture minister.

"There was a climate of willingness and cooperation," he added after an initial cabinet meeting of the 21-strong group.

In the clearest break from the past government, the interior ministry, previously headed by the League's tough-talking leader Matteo Salvini, was handed to a career civil servant and immigration specialist Luciana Lamorgese.

CONFIDENCE VOTES

Unlike Salvini, who critics say spent more time on Twitter than in his ministry, Lamorgese has no social media accounts and will adopt a much lower profile than her predecessor as she looks to work with Brussels on drawing up new migration rules.

By the middle of May, Salvini was reported to have only gone to his ministry for 17 days since the start of the year, a figure he has not publicly disputed.

The government will not be fully operational until it wins confidence motions in the lower and upper houses of parliament slated for Monday and Tuesday respectively.

Conte is expected to win both votes, but his government will only have a slender majority in the upper house Senate which could come back to haunt him when particularly sensitive legislation gets put before the house.

The coalition's first task will be to draw up a budget for 2020. In a shared policy platform laid out earlier this week, the 5-Star and PD promised expansionary measures to boost the stagnant economy and also pledged to head off a major VAT hike set to kick in on Jan. 1.

The new economy minister is Roberto Gualtieri, the chairman of the European Parliament's Committee on Economic and Monetary Affairs. His appointment sent a clear signal Rome wanted to reset its relations with Brussels, which twice threatened the last coalition with disciplinary action over the public accounts.

Salvini pulled the plug on the government in the hope of triggering early elections that he was certain his resurgent League party would win. But he failed to foresee that 5-Star and the PD would put aside their mutual animosity and join forces.

As the new cabinet was sworn in, Salvini said "strong powers" within Europe were behind the new coalition.

"It won't last long," he wrote on Twitter. "Opposition in parliament, in town halls and in the squares, then finally we will vote and win."

(Reporting by Crispian Balmer; Editing by Jon Boyle)