Italy LIVE: EU BRACES as crunch morning talks to spark July election and RISE of populists

Italy, the eurozone's third largest economy, is in political turmoil after the two populist parties Five Star Movement (M5S) and Lega were blocked from forming a government.

The crisis caused its biggest market sell-off in years with the euro falling to a 10 month low against the dollar today.

Chaos unfolded on Monday when President Sergio Mattarella prevented the populist coalition from forming an obscure, anti European alliance by vetoing the appointment of anti-euro professor Paolo Savona as Ministry of the Economy.

Instead Mr Mattarella asked former International Monetary Fund official and europhile, Carlo Cottarelli, to form an interim government of technocrats.

But Mr Mattarella could choose to skip the appointment of a technocratic government, which would mean Italy is headed for a second election, likely to boost the popularity of the populist parties, Five Star and Lega.

The pair met this morning for brief informal talks, according to a presidential source said.

Prime minister-designate Mr Cottarell has failed so far to find support from any major party for even a stopgap administration.

Sources close to some of Italy's main parties said there was now a chance that President Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29 - less than four months after the inconclusive March 4 vote.

Another election is likely to turn into a vote of Italy’s confidence in the eurozone and some market players fear it will become a de facto referendum on the single currency and Italy's role in the EU. 

However, some Italian newspapers are holding out the prospect of a last-minute deal to avoid repeat elections and installing a ruling coalition of the two anti-establishment parties.

However opinion polls show a snap election is also likely to deliver an even stronger anti-establishment vote.

The latest Ipsos opinion poll has only fuelled predictions that Mr Mattarella’s intervention will see populists gain a bigger share of the vote, casting doubt on Italy's future in the eurozone.

The poll published this morning showed support for the right-wing Lega party up eight per cent to 25.4 per cent compared to its result during the March 4 elections.

The IPSOS poll in the Corriere della Sera newspaper also showed support for the Five-Star Movement holding steady at around 32.6 per cent.

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Antonio Maria Rinaldi told Express.co.uk Brussels had failed to provide a secure way out to member states willing to abandon the euro.

9:33am update: Juncker has urged EU members to stand up against 'rampant' populism 

Speaking today, EU boss Mr Juncker said: “Yes, in a years time European citizens would have voted in a new European Parliament.

“Nobody can second guess what shape it will take it will be different to this parliament, for some of my people that is a source of concerns.

“Let’s stand up against the rampant populism that we are seeing in European in all countries including mine, but Luxembourg people are by and large, wise.

“So it is not a large movement but it is a containable movement.”

9:23am update: Lega would BOOST share of votes if election was called - latest polls 

A new opinion poll showed Lega, which argues that fiscal rules governing the euro zone are "enslaving" Italians, would boost its share of the vote to a quarter, from around 17 per cent on March 4

9:04am update: Populist parties renew efforts for a coalition goverment 

Italy's anti-establishment Five-Star Movement and far-right party Lega are ploughing ahead with plans to form a coalition government after the president rejected their eurosceptic economy minister pick at the weekend 

The parties are trying to find "a point of compromise on another name" for the economy ministry, according to a source close to Five-Star. 

The coalition may also be widened to include another right-wing party, the Brothers of Italy. 

8:41am update: The EU is bracing for an outcome after crunch talks 

Presidential source says the Italian PM-designate Carlo Cottarelli is holding "informal talks" with President Sergio Mattarella