Socialist leader António Costa | FRANCISCO LEONG/AFP/Getty Left turn in Lisbon Portugal’s defeated Socialists seek government deal with far left.

LISBON — Ten days after losing Portugal's election, Socialist leader António Costa is attempting to forge an anti-austerity alliance with the Communists and other radical anti-euro leftists to oust conservative Prime Minister Pedro Passos Coelho.

Such a deal would turn Portuguese politics on its head. Costa is racing to reassure jittery markets and worried eurozone partners that a leftist government would remain committed to the single currency.

"Europe can rest easy, the Socialist Party is not Syriza," Costa told Agence France Press in a spate of hastily arranged interviews Tuesday. "Investors shouldn't be concerned."

While Costa was passing on comforting words to European ambassadors Wednesday, technical teams from the Socialist Party (PS) were meeting with counterparts from the Portuguese Communist Party (PCP) and the Syriza-allied Left Bloc (BE) to draft terms of a government deal.

Costa insists his potential partners on the hard left have dropped their more radical demands, such as pulling out of NATO, large-scale nationalization, renegotiation of the national debt and withdrawal from the eurozone.

"What I want to transmit, especially to markets, is that Portugal will maintain the stability of its European commitments," he told Reuters. "For the first time, there can be a government that reflects the left's majority in parliament, without posing a risk to European rules."

Yet the Socialists will face a hard task seeking to simultaneously abide by euro-zone budgetary rigor, making Portugal's fragile economy more competitive, and fulfill a left-wing wish list that includes higher wages and pensions, tax cuts and greater welfare protection.

"Markets would see a government that includes the two ultra-left parties with deep suspicion," warned Holger Schmieding, chief economist at Berenberg bank in London.

"Any serious reform reversal or loose talk about leaving the euro or NATO would likely cause a major rise in borrowing costs and possibly a new crisis," he told POLITICO. "It would take very strong assurances from a left-wing government ... to alleviate such concerns."

Leftist gains

The elections on October 4 were a disaster for Costa, who squandered an early poll lead and handed victory to Passos Coelho's center-right coalition, which captured 104 seats in the Assembleia da República, ahead of the Socialists with 85.

Passos Coelho fell short of an absolute majority, however. Voter dissatisfaction after four years of austerity gave the Left Bloc its best-ever result with 19 seats, while the hardline Communists captured 17.

Nevertheless, President Aníbal Cavaco Silva gave Passos Coelho the lead in forming a government.

The traditionally moderate and pro-euro Socialists were expected to line up behind a center-right program that eased up gradually on austerity but stuck to commitments to keep bringing down the budget deficit and reduce the eurozone's third-highest public debt.

Costa has yet to completely rule out a compromise with the center-right, but he's made clear his preference is for a deal with the far left that makes him prime minister.

"We made absolutely no progress," Passos Coelho complained after presenting Costa with a list of concessions Tuesday to tempt his rival into a centrist accord.

"We hoped we'd get some counter-proposals from them, but this didn't happen," Passos Coelho told reporters. "The country needs to know if there is the political will to find an agreement."

European power-brokers in Brussels and Berlin had welcomed Passos Coelho's election victory as a sign eurozone governments could push through painful reforms and get re-elected.

Markets rattled

With over 70 percent voting for mainstream parties on the right and left, Portugal was held up as a contrast to radicalized Greece, where Syriza defeated middle-of-the-road parties twice in elections this year, and Spain and Ireland, who have seen anti-establishment parties surge as polls approach.

As yet there's no market panic in Portugal — or talk of a "Poxit" — but markets are starting to worry.

Lisbon's stock exchange fell by almost 5 percent early this week, with banks hardest hit. The government managed to sell €1.3 billion in bonds Wednesday, but at higher rates than the last sale back in February.

The coming days will be crucial in determining Portugal's direction.

Some Socialists are unhappy with Costa cozying up to the far left. They fear a rupture with the moderate stance forged by the party since the heady days of the mid-1970s, when Portugal flirted with far-left rule after overthrowing four decades of rightist dictatorship.

Veteran Socialist lawmaker José Lello said the Communists and Left Bloc "aren't being serious."

"Two weeks ago they were saying something completely different, they are not going to accept the euro, nor the (eurozone) Fiscal Compact, nor anything else, have they really changed?" he said to reporters.

A revolt by a handful of Socialist moderates in parliament could scuttle Costa's outreach to the far left.

Failing that, Portugal looks set for more political uncertainty, be it under a Socialist government dependent on the far-left, or a center-right administration kept in power by Socialist votes. Either way, the result looks to be a weakened government with a high risk of fresh elections next year.