By James Mackenzie
ROME, April 27 (Reuters) - Italian Prime Minister-designate Enrico Letta will meet President Giorgio Napolitano on Saturday, the president's office said, giving Letta the opportunity to update Napolitano on his attempts to form a government.
After the meeting at 1300 GMT, Letta, the deputy leader of the centre-left Democratic Party (PD), may announce his list of cabinet members, ending more than two months of political deadlock since February's inconclusive national election.
Letta spent more than two hours on Saturday in talks with centre-right leader Silvio Berlusconi, whose People of Freedom party (PDL) would be the PD's main coalition partner in government if a deal is reached.
Berlusconi said after the meeting that he was 'confident' that Letta would be able to announce his list of ministers later on Saturday. Berlusconi added that he would not be a minister.
A source in the office of President Giorgio Napolitano also said he expected Letta to announce his cabinet on Saturday.
Agreement has been held up by wrangling over ministerial posts and policy differences, notably over Berlusconi's demand to scrap the unpopular IMU housing tax, a move that would blow an 8 billion euro hole in this year's budget plans.
Letta, a 46-year-old moderate on the right of the PD and the nephew of one of Berlusconi's closest aides, said on Friday that he was determined to reach an accord. If the sides reach an agreement on Saturday, he could go before parliament for a confidence vote as early as Monday.
Italy, the euro zone's third-largest economy, has been without an effective government for months, with the long post-election deadlock holding up any concerted effort to end a recession set to become the longest since World War Two.
Letta received some encouragement late on Friday when the ratings agency Moody's kept its rating on Italian government debt unchanged at Baa2 because low interest rates were making it possible to buy time to implement much-needed reforms.
Bond yields have fallen to their lowest in more than two years as investors hope for enough stability to help Italy revive its economy and gradually tackle its large public debt.
However, Moody's also said medium-term growth prospects were weak and forecast the economy would shrink by 1.8 percent this year, compounding more than two decades of stagnation.
Letta has said his priorities will be boosting the economy and tackling unemployment, restoring confidence in Italy's discredited political institutions and trying to turn Europe away from austerity to focus more on growth and investment.
On paper, the priorities laid out by Letta fit in well with proposals from Berlusconi's camp, which has been attacking the austerity policies pursued for months by the outgoing prime minister, Mario Monti.
But the selection of ministers will show more clearly how a Letta government will work in practice.
Berlusconi, in the middle of legal battles over a tax fraud conviction and charges of paying for sex with a minor, has pressed for the cabinet to include close political allies, and has rejected technocrats like those who served under Monti.
He has backed Renato Brunetta, lower house leader of the PDL, for the key Economy Ministry and also wants to place party secretary Angelino Alfano in the government, possibly as deputy prime minister.
But there is strong resistance in parts of the Democratic Party to an accord with Berlusconi, its sworn enemy for almost 20 years.
Former party leader Pier Luigi Bersani, who resigned this month after a party rebellion, told Letta on Saturday that he should not accept a deal with the PDL on any terms, according to a person with knowledge of their conversation.
Without an agreement, there would be no alternative to new elections, a disastrous prospect for the centre-left, which threw away a 10-point lead before the last poll and now trails Berlusconi by more than five points, according to a poll by the SWG institute on Friday.
The other main force in parliament, Beppe Grillo's anti-establishment 5-Star Movement, has ruled out taking part in a government made up of the two main parties.
He called the right-left coalition 'an orgy worthy of the best of bunga bunga', a reference to Berlusconi's much publicised parties at his private villas.
(Additional reporting by Roberto Landucci, Gavin Jones, Steve Scherer; Editing by Kevin Liffey and Mike Collett-White) Keywords: ITALY VOTE/
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