ROME (Reuters) - Silvio Berlusconi denied he may stand aside to let his ally the League form a government with the anti-establishment 5-Star Movement, after senior sources from his Forza Italia party said on Tuesday he was considering it.

Forza Italia leader Silvio Berlusconi speaks following a talk with Italian President Sergio Mattarella at the Quirinale palace in Rome, Italy, April 12, 2018. REUTERS/Max Rossi

Italy has been stuck in political limbo since inconclusive elections in March, with 5-Star offering to form a government with the far-right League but only on condition that it breaks clear from its veteran partner, Berlusconi.

Italian markets fell sharply earlier on Tuesday as investors feared a new election would further benefit the League and 5-Star at the expense of mainstream groups.

Forza Italia has so far refused to withdraw and allow the League to launch a government with 5-Star alone, but three senior party sources told Reuters on Tuesday it may now be ready to change its position.

“Berlusconi is thinking about it,” one source said.

Shortly afterwards the 81-year-old former prime minister issued a statement saying he “firmly denied” media reports that he could step aside, adding that his party “can accept no vetoes” against its participation in government.

Prospects are growing of an unprecedented summer re-vote which opinion polls suggest would see Forza Italia haemorrhaging vote to the increasingly buoyant League, which is the dominant partner in the conservative bloc.

The March 4 election saw the centre-right alliance winning the most seats, while 5-Star was the biggest single party.

Both groups fell well short of a majority, and while 5-Star says it is willing to hook up with the League, it has refused to deal with the scandal-plagued Berlusconi, seeing him as a symbol of political corruption.

The League has refused to abandon its old ally, but it is putting increasing pressure on him to stand aside voluntarily.

“We are continuing to ask Berlusconi to make a gesture of responsibility and help us give this country a government,” said senior League politician Giancarlo Giorgetti, indicating he wanted Forza Italia to agree to sit out of a government deal.

Forza Italia faces a lose-lose situation. If it gives in to the League, it risks becoming an irrelevance in parliament. If it pushes for a re-vote, it seems set to lose many of its seats.

PRESIDENTIAL CONCERN

5-Star leader Luigi Di Maio is calling for snap elections in July, and said on Tuesday he had “stopped hoping” there would be any change in the position of Berlusconi or the League.

An SWG poll released on Tuesday showed the League, which has presented itself as the voice of reason in the political impasse, on 24.2 percent against the 17.4 it took in March, while Forza Italia was on just 9.4 percent from 14 percent.

The same survey showed 5-Star and the Democratic Party (PD), which has ruled for the last five years, broadly unchanged from their March 4 results on 32 percent and 19 percent respectively.

President Sergio Mattarella, a key player in Italian politics, is eager to avoid an immediate election, fearing it will result in another stalemate and damage the economy.

He said on Monday he planned to nominate a “neutral government” to draw up a 2019 budget to stave off the threat of an automatic increase in sales taxes that would be triggered because of missed deficit targets.

A source in his office said the president would name the new prime minister on Wednesday or Thursday in the hope that parliament will give the nominee the necessary confidence votes to pursue a limited mandate that would expire in December.

That looks highly unlikely, with both the League and 5-Star highly hostile to the idea.

If parliament rejects the president’s pleas, then the earliest possible date for an election would be July 22, when many Italians will have gone on holiday, meaning turnout could slump.

Italy traditionally holds its national elections in the spring and the latest it has ever voted was June 26, in 1983.