The Italian president, Sergio Mattarella, has granted Italy’s two populist leaders more time to form a government in an attempt to stave off a snap election.

Mattarella signalled he was ready to install a technocrat government if a deal could not be reached, but decided to give Luigi Di Maio of the Five Star Movement and Matteo Salvini of the League more time to draw up a list of ministers that could be accepted by all parties, according to a source close to the presidential palace.

The decision to “slow things down” – taken three months after an election that resulted in a hung parliament – was an attempt to try to stem a possible financial crisis, after markets slumped on Monday and Tuesday owing to fears of what a new vote could bring.

The financial markets welcomed the decision as the euro soared 1.1% on Wednesday after hitting a 10-month low the previous day. It maintained the gains in the Asian trading session overnight and stock markets were also positive. The Nikkei rose 0.5% in Tokyo while the Kospi in Seoul was up 0.6%.

A bitter row between Mattarella and the two populists at the weekend had prompted the latter to step back from their plan to assume power, but the latest twist means Di Maio and Salvini could yet form a government.

It is unclear, however, whether the pair will stick by plans to nominate Giuseppe Conte, a law professor, as prime minister – a controversial choice since he has no political experience – and a Eurosceptic as finance minister.

On Sunday night Mattarella refused to endorse the nomination of Paolo Savona for the finance brief, saying his appointment would send a message to markets and investors that Italy was prepared to default on its obligations to Brussels and might even contemplate an exit from the eurozone. Mattarella said leaving the euro posed a risk to all Italians’ financial security.

Mattarella’s decision set off a chain of events that roiled Italian markets: Conte resigned as prime minister-in waiting and new elections appeared to be imminent, worrying markets and officials in Brussels. Their concern was that new elections could strengthen populist gains in Italy, leading to even greater uncertainty about the country’s future in the eurozone.

Those fears were slightly allayed on Wednesday after Di Maio opened the door to new talks with Salvini and suggested he was open to reaching a compromise that could satisfy Mattarella’s objections.

Di Maio suggested he was open to dropping Savona as finance minister and putting him into another post, but still wanted Conte, who has served as Di Maio’s personal attorney, to serve as prime minister.

Di Maio said that if a deal could not be reached, he favoured snap elections. “There are two paths ahead. Either we launch the Conte government with a reasonable solution or we vote right away,” he said.

Italian markets rallied on the news. Any government formed by M5S and the League would have a relatively narrow majority in the senate, limiting its ability to take any dramatic action.

Salvini, the bombastic and xenophobic head of the League, who put forward plans during the election campaign to detain and deport hundreds of thousand of immigrants, indicated he still favoured snap elections.

“Di Maio is open [to a deal]? We are not at the market. Let’s go vote right away. We have tried to do a government but it is never good enough for Mattarella, so then you give up. The president should explain how we get out of this impasse,” he said.

Even before the fracas over Savona’s appointment, the marriage of convenience between Di Maio and Salvini has looked tenuous since the 4 March election.

The M5S and the League are Italy’s biggest populist parties but differ significantly on policy. An agreement reached this month for a shared agenda was focused on plans to increase spending, cut taxes and take a far tougher approach on immigration than the previous centre-left government, including by creating new detention centres across Italy.

Di Maio and Salvini reached a deal to nominate Conte to serve as prime minister last week. Mattarella agreed on the choice, despite questions over whether he had padded out his CV.

Mattarella has faced intense scrutiny for his handling of the crisis, with both Di Maio and Salvini accusing the president of acting too politically when his role is supposed to be politically neutral.