Analysis: Italy deadlock close to an end but problems not over By Barry Moody ROME (Reuters) - Months of paralyzing political deadlock seem close to an end in Italy with a new government possible within the week, but there are still questions over whether the stability can last. President Giorgio Napolitano has reluctantly been re-elected for an unprecedented second term after traditional politicians begged him to stay on and deal with one of the most turbulent moments in recent Italian political history. Now there is some optimism that a government can be formed within the week, nearly two months after February's inconclusive election. Following are the scenarios and potential problems following Napolitano's re-election, both for the short and medium term: Napolitano, who is 87, has emerged from the turmoil with his power greatly enhanced compared to the previous few months, when as an outgoing president his arms were constitutionally tied. Now he not only has the big stick of being able to call a snap election, which many politicians want to avoid, but is thought to have obtained solid assurances of cooperation from party leaders who begged him to stay on. Napolitano is expected to hold a rapid round of consultations with political parties on Tuesday, banging their heads together and then handing a mandate to a potential new prime minister as soon as Wednesday. This prime minister-designate would try to form a broad based coalition between the divided center-left and Silvio Berlusconi's center-right plus the centrists of outgoing Prime Minister Mario Monti within the week. Beppe Grillo's populist 5-Star Movement bitterly opposes the deal that re-elected Napolitano and would remain in opposition, joined by the leftist SEL party of Puglia governor Nichi Vendola. Napolitano's favorite to lead this government is said to be veteran politician Giuliano Amato, a 75-year-old former premier with the experience and skills to face the political chaos. However, after the election in February showed an overwhelming desire for change, Amato may be seen as too old and too much a member of the traditional establishment. One alternative is Enrico Letta, the 46-year-old outgoing deputy leader of the divided center-left Democratic Party (PD). However the PD splits may torpedo Letta, leaving Napolitano to choose a less established political figure. Whoever is given the mandate is expected to try to form a government by the end of the week with ministries mixed between senior politicians and a few technocrats. They could include members of Monti's government or of the two commissions of "sages" that Napolitano set up last month to propose reforms to mend the broken political system and address a chronic recession that has incited serious public anger. Estimates of the life of the new government vary between one and two years - if it survives at all. A common prediction is that a new election could be held in June 2014, coinciding with European polls and saving money for Italy, which has one of the world's biggest public debts. High among the government's priorities would be policies to restore growth to a chronically stagnant economy, stimulate employment and reform a dysfunctional electoral law which is one of the main reasons for the long deadlock since February. Although this outcome is widely predicted, the new mood has not eliminated several elements of potential instability. Chief among these is the explosion inside the Democratic Party whose leader Pier Luigi Bersani has resigned and is said to be a broken man after party rebels torpedoed two presidential candidates he had ordered them to vote for last week. There is now open factional warfare inside the party which could make it difficult to forge a reliable deal on a government or avoid parliamentary sniping against the new administration. The leftwing of the party opposes any coalition with media magnate Berlusconi, who faces a string of scandals, and divisions over this were at the center of Bersani's difficulties. If a section of the party objects to a government deal, it could split off and join Vendola in a new leftwing grouping which might ally with Grillo's populists. But another danger is that Berlusconi, with his enemies in total disarray, could decide to exploit his advantage and go back to the polls within months if he doesn't get what he wants in the new government. However, doing so before the electoral law is repealed could repeat the current deadlock, leaving Berlusconi as stranded as Bersani has been after winning most votes in the last election. By far the biggest loser is Bersani, an amiable but colorless politician whose string of errors have destroyed his career and brought his party to the brink of collapse. The biggest winner looks like Berlusconi, who is now riding high, having overtaken the center-left at the top of the opinion polls and projecting an image of statesmanlike restraint as Bersani's party falls apart. He has been calling for a broad based grand coalition for weeks. It is an extraordinary reversal of fortunes from as recently as last November when Berlusconi looked a beaten man, his People of Freedom (PDL) party was fracturing, and Bersani had a 10-point lead in opinion polls. But Berlusconi, 76, has long been acknowledged as one of Italy's most skilful politicians, with enviable communication skills complimented by his television empire. Bersani has proved to be one of the worst. Another big winner looks like being Matteo Renzi, the 38-year-old mayor of Florence, an outspoken opponent of Bersani and who, in contrast, is a dynamic and effective politician. However, Renzi needs time to set him up as the center-left candidate in the next election and he said on Monday there should be no vote for a year. Renzi has long been seen as a game changer in Italy with the skills to defeat Grillo's rabble rousing tactics - unlike Bersani - and also attract a big chunk of center-right voters. But it remains to be seen whether a center-left robbed of its left wing, which opposes Renzi, would be strong enough to defeat Berlusconi and Grillo in a new election. Whether Grillo is a winner or loser from all this is the subject of debate. Certainly, after weeks of perfect tactics he made a major blunder on Saturday by calling for a "march on Rome" to oppose what he denounced as an establishment stitch-up to re-elect Napolitano. The inflammatory language, which evoked images of the march on Rome by fascist leader Benito Mussolini in 1922, was widely condemned even by some of Grillo's own supporters. The latest debacle, however, may boost disillusion among Italian voters that could help Grillo, unless the new government really does succeed in passing major reforms quickly. Editing by Anna Willard