UPDATE 1-Italy's PM Conte confident to finalise talks over new govt by Wednesday

Italy's prime minister said on Sunday he expected to finalise talks over a new government by Wednesday, as 5-Star Movement and once bitter adversary Democratic Party are into intense talks to hammer out a deal over a common agenda and cabinet posts.

Italy's president Sergio Mattarella gave Prime Minister Giuseppe Conte a mandate on Thursday to try to form a new coalition in the wake of Matteo Salvini's decision to pull his right-wing League from its 14-month-old alliance with 5-Star to seek early elections. Conte said the "political mood" between 5-Stars and PD was good.

"It will be on Tuesday, Wednesday at the latest," he said in a video interview during a conference organised by Il Fatto Quotidiano newspaper, when asked when he would report back to Mattarella with a program and a line-up for the new government. "Obviously I am confident on a positive outcome." he added.

If no agreement is sealed in the coming week, Mattarella is expected to dissolve parliament and set a date for a new vote. Stung by what it saw as betrayal and keen to avoid a return to the ballot box, the populist 5-Star has agreed to make an attempt to govern with centre-left PD, which is in the process of rebuilding after a string of election defeats.

But despite the differences over policy and ministerial roles, senior figures from both sides have been speaking in support of a coalition during the weekend as the talks have continued. "I know it is difficult, but we're doing our best to give this country a new government," PD leader Nicola Zingaretti said on Sunday in a video post on Twitter.

He said on Friday after talks with Conte that Italy's next government must cut income taxes to boost consumption, relaunch investment and focus on health and education. Former prime minister and former PD leader Matteo Renzi, to whom many party lawmakers owe their allegiance, was quoted in Il Sole business daily as saying: "We do politics thinking of a common good. Italy needs a government that averts a planned VAT tax increase and pulls the country out of the isolation in Europe caused by Salvini."

Beppe Grillo, the influential founder of 5-Star, came out in favour of a deal on Saturday, calling on the PD to seize the "unique" chance to form a coalition. "Another chance like this one will not come again," the comedian said in a video posted on his blog. "Let's try to dream, to have a vision."

5-Star leader Luigi Di Maio has also made a string of policy demands for a new government - including the confirmation of a decree clamping down on migrant sea rescues - setting an uncompromising tone for the negotiations. The PD has proposed scrapping the deputy prime minister's position, a job that both it and 5-Star wanted.

Salvini's League remains the most popular party, despite toppling the government. A poll published on Saturday by Corriere della Sera daily newspaper showed support for the League fell back to 31.8% from a mid-July record high of 35.9%. Five-Star rose almost 7 percentage points from mid-July to 24.2% according to the same poll, while PD rose only marginally to 22.3%.