Italy has avoided a damaging second national election after Giuseppe Conte was named prime minster of a coalition of the country’s two anti-establishment parties.

The coalition deal promises to end three months of political turmoil with a government that aims to ramp up spending, challenge European Union fiscal rules and crack down on immigration.

The move ends inconclusive elections in March and removes the risk of a repeat vote, a prospect that had sparked a big sell-off in Italian financial markets this week.

The leaders patched up their alliance after agreeing to substitute a eurosceptic they had initially proposed as economy minister, a nomination that had been rejected by the head of state.

Mr Conte was destined to become prime minister last week before Whitlam-like dismissal crisis threatened to derail his prime ministership before it had begun. 

The new deal means he will lead the alliance between the right-wing League and his 5-Star Movement.

“All the conditions have been fulfilled for a political, 5-Star and League government,” 5-Star chief Luigi Di Maio and League leader Matteo Salvini said in a joint statement after several hours of talks in central Rome.

The deal followed an extraordinary few days in which Mr Di Maio called for the head of state to be impeached, two successive prime ministers-designate were tasked to form a government, one of whom quit only to be reinstated on Thursday evening.

Rome resident Vincenza Cariano summed up the exasperated mood on the street: “I can’t stand it anymore. The country needs certainties, security and equilibrium.”

The breakthrough came after the League and 5-Star agreed to drop economist Paolo Savona as their choice for economy minister.

Mr Savona, an 81-year-old economist, had said previously that Italy should have a contingency plan to abandon the euro.

He will be substituted by economics professor Giovanni Tria, another little-known figure, party sources said.

Italy, with debts totalling 130 per cent of its economic output, is the most heavily indebted eurozone nation after Greece and is often described as “too big to fail”.

Although investors were relieved to avoid repeat elections, which they feared could have become a de facto referendum on the euro, they are now likely to refocus on the big spending plans of the League and 5-Star, which would add to its debts.

The coalition has also said, in a joint policy manifesto signed during their first attempt at a union, that they will push the EU to review the bloc’s fiscal rules, which Mr Salvini says have “enslaved” Italians.

Mr Tria has been critical of the EU’s economic governance, but unlike Mr Savona he has not advocated a contingency plan for exiting the euro.

-with AAP