President Sergio Mattarella summoned Carlo Cottarelli to his office after two anti-establishment parties angrily abandoned their plans to form a coalition in the face of a veto from the head of state over their choice of economy minister.
In a televised address, Mattarella said he had rejected the candidate, 81-year-old eurosceptic economist Paolo Savona, because he had threatened to pull Italy out of the euro zone.
Markets rallied on the news that Italy's economy, the euro zone's third-biggest, would not be guided by a government hostile to the single currency.
"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," Mattarella said, adding: "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."
After the coalition's collapse, Italian bonds, stocks and the euro rallied. Europe's single currency pulled off more than 6-month lows, and the closely watched gap between Italian and German 10-year bonds tightened nearly 15 basis points. Italy's stock market opened up 1.5 percent.
The League and 5-Star, which had spent days drawing up a coalition pact aimed at ending a stalemate following an inconclusive March vote, responded with fury to Mattarella, accusing him of abusing his office.
5-Star leader Luigi Di Maio called on parliament to impeach the mild-mannered Mattarella, while League chief Matteo Salvini threatened mass protests unless snap elections were called.
"If there's not the OK of Berlin, Paris or Brussels, a government cannot be formed in Italy. It's madness, and I ask the Italian people to stay close to us because I want to bring democracy back to this country," Salvini told reporters.
While he had approved all their other ministerial picks, Mattarella said he had the right to block nominations that could harm the country. He added that the League and 5-Star had refused to put forward any other name for the role.
Shortly afterwards, the president's office summoned Cottarelli, the IMF's former director of fiscal affairs, for a meeting on Monday. Such a call is usually a prelude to being offered a mandate to form a government. No time was given for the meeting.
Cottarelli would be a calming choice for the financial markets, but any technocratic administration would likely only be a short-term solution because the majority of parliamentarians have said they would not support such a government.
On Monday, Salvini said in a radio interview he would seek parliamentary support from 5-Star to change the electoral law. The current purely proportional system produced a hung parliament two months ago, and polls suggest it could happen again.
The League, which won 17 percent of the vote in March, would surge in any early ballot, polls show, while support for 5-Star remained strong, above 30 percent.
Mainstream centre-left and centre-right parties were seen losing further ground in the face of voter anger over the sluggish economy, high unemployment and rising poverty.
Demanding an immediate ballot, Salvini told followers on Facebook: "It won't be an election, it will be a referendum between Italy and those on the outside who want us to be a servile, enslaved nation on our knees."
However, Salvini dismissed calls on Monday by 5-Star and a far-right ally, the Brothers of Italy, to chase Mattarella out of office.
"We will ask parliament to charge Mattarella with high treason because he has acted under foreign pressure," Brothers of Italy chief Giorgia Meloni said on La7 television channel.
The 5-Star's Di Maio demanded impeachment under article 90 of the constitution. Under that clause, parliament can seek to remove a president if a simple majority of lawmakers votes in favour. The constitutional court would then be called to decide whether to enforce the decision.
"We need to keep cool. Some things cannot be done in the throes of anger," Salvini said.
The centre-right Forza Italia party and the centre-left Democratic Party (PD) both denounced calls for impeachment.
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