Italian President Sergio Mattarella on Thursday gave Italy's bickering parties five days to clinch a deal to resolve a political crisis and avoid a snap election.

The euro zone's third-largest economy is in political turmoil after its government, riven by months of infighting, imploded this week, forcing prime minister Giuseppe Conte to resign just as he was to begin preparing the 2020 budget.

Speaking to reporters in the presidential palace after two days of talks with parties, Mattarella said dissolving parliament just 17 months after the last election was a decision that should not be taken lightly.

He said some parties had told him they were trying to form a solid majority and he told them to report back on Tuesday for two more days of consultations.

"I have a duty to ask for rapid decisions," the 78-year-old president said, citing the urgency of Italy's European Union commitments and its difficult economic situation.

Mattarella did not name any parties, but hopes of a deal center on the anti-establishment 5-Star Movement, which has governed since last year with the hard-right League, and the center-left opposition Democratic Party (PD).

The PD on Thursday set tough conditions for an accord, increasing the chance of an autumn election. However, the situation is fluid, there is plenty of negotiating room, and Mattarella has now given the parties some time.

The government collapse was triggered by League leader Matteo Salvini, who declared the ruling coalition dead two weeks ago, saying he could no longer work with 5-Star because of its foot-dragging over the League's economic policy agenda.

High stakes 

Salvini called for an election, aiming to cash in on his surging popularity to return to power, this time as prime minister, with a mandate to launch a big spending spree next year and challenge the European Union's fiscal rules.

His move could backfire, though. Mattarella will only dissolve parliament if no other coalition can be formed. If 5-Star and the PD clinch a deal that would give Italy a more moderate, Europe-friendly government, the League will end up in opposition.

Speaking to reporters after his meeting with the president, 5-Star leader Luigi Di Maio made no reference to the PD but made clear his party was working to avoid a return to the polls.

"In recent hours, all the necessary contacts have been launched to find a solid majority," he said, adding that he had handed Mattarella a list of 10 reforms that he wanted to see completed before parliament was dissolved.

Many of these, ranging from an investment plan for the poor south to legislation on conflicts of interest and to speed up the justice system, are among 5-Star's flagship policies.

Markets have rallied on hopes that a 5-Star/PD deal is in the offing, dismissing a number of apparent stumbling blocks.

On Wednesday, PD leader Nicola Zingaretti laid down five conditions for an accord – "loyal membership" of the European Union; giving parliament a central role; economic development based on environmental sustainability; a change in handling migrants; and a change to economic policy to boost investment.

Those seemed low hurdles for 5-Star to clear, but Zingaretti then added that he would not accept Conte, a technocrat who is close to 5-Star, as premier.

Conditions

On Thursday he raised the stakes further with three more specific conditions: 5-Star must agree to repeal laws on security and immigration passed during its coalition with the League; revise a plan to cut the number of lawmakers to 600 from 945; and immediately commit to a framework agreement with the PD on the 2020 budget.

It remains to be seen if Zingaretti's tough stance is just a negotiating ploy, or if he is ready to face an election – partly to settle scores in his divided party, where many lawmakers still answer to his predecessor, former prime minister Matteo Renzi.

Later on Thursday, Zingaretti said the proposals set out by himself and Di Maio were "a framework that we can certainly begin to work with".

5-Star's support has slumped over the last year and it does not want a return to the polls, but it has warned the PD that it should not push too hard.

"We will not accept the PD's vetoes, they can't say we must accept their five points or it's no deal, that Conte must go or it's no deal," said Manlio Di Stefano, a junior foreign minister and one of 5-Star's most prominent lawmakers.

The outlook was further complicated on Thursday when Salvini said after his own talks with Mattarella that he would still consider a return to government with 5-Star if it adopted a more constructive approach to the League's policies.

"Luigi Di Maio has worked well and in the interests of this country ... if he wants to relaunch the government and relaunch the country we are ready, without any prejudice," Salvini said.

An opinion poll by the Tecne agency – the first since the crisis began – had the League's support falling, at 31.3%, and the PD and 5-Star both gaining ground, on 24.6% and 20.8% respectively.