A deal on the formation of a new government has been reached in Italy, ending two months of political deadlock since the general election.

The agreement was announced after Prime Minister-designate Enrico Letta met President Giorgio Napolitano.

The coalition brings together Enrico Letta’s Democratic Party (PD) and the People of Freedom party (PDL) of former PM Silvio Berlusconi.

The swearing-in is to take place on Sunday at 11:30 local time.

Silvio Berlusconi had said he would not be a minister, but had pushed for leading figures from his party to be given top posts.

Angelino Alfano, the PDL’s secretary, will become deputy prime minister and interior minister in the new government.

Among the other key appointments proposed, Bank of Italy director general Fabrizio Saccomanni will head the powerful economy ministry and former European Commissioner Emma Bonino will become foreign minister.

Italian Prime Minister-designate Enrico Letta has agreed new government ending two months of political deadlock

The formation of the new government brings to an end a political deadlock that has unnerved financial markets since February’s inconclusive election.

President Giorgio Napolitano said the government would have the support of both chambers of parliament.

“I hope that this government can get to work quickly in the spirit of fervent co-operation and without any prejudice or conflict,” he said.

“It was and is the only possible government.”

The new government has to deal with a rapidly declining economic situation, rising unemployment – particularly among under the 35s – and lack of growth, despite some draconian austerity measures passed by the previous government of technocrats.

Enrico Letta, 46, is considered a moderate within the PD and is linked to Silvio Berlusconi through his uncle, Gianni Letta, who is one of Berlusconi’s closest aides.

Silvio Berlusconi is still contesting charges of tax fraud and sex with an underage prostitute, but recent opinion polls suggest his popularity has increased, giving him greater bargaining power.

Enrico Letta expressed “sober satisfaction over the team we put together”.

He has said he will shift the focus away from austerity to resolve Europe’s economic problems.

Enrico Letta’s candidacy for prime minister emerged after the PD leader, Pier Luigi Bersani, announced his resignation following a party rebellion over his choice for Italian president and his refusal to work with Silvio Berlusconi.

The third strongest force to emerge from the Italian election, the Five Star movement led by former comedian, Beppe Grillo, has refused to take part in a coalition with the two main parties.

He likened such a coalition to “an orgy worthy of the best of bunga bunga” in a barb directed at Silvio Berlusconi’s renowned private parties.

President Giorgio Napolitano, who is serving an unprecedented second term, has suggested he might resign if a new government fails to enact reforms.

Italian government – proposed posts:

• Enrico Letta, 46: Prime minister
• Angelino Alfano, 42: Deputy PM and interior  minister
• Fabrizio Saccomanni, 70: Economy minister
• Emma Bonino, 65: Foreign minister
• Anna Maria Cancellieri, 69: Justice minister
• Enrico Giovannini, 55: Labour minister
• Mario Mauro, 51: Defence minister

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