Center-left leader appointed as Italy's prime minister.

By Barry Moody and James Mackenzie

ROME, April 24 (Reuters) Italian President Giorgio Napolitano on Wednesday invited center-left parliamentary leader Enrico Letta to form a new government, signaling the end of two months of political deadlock in the eurozone's third-largest economy.

Under Napolitano's guidance, the new prime minister—a former Christian Democrat considered part of the right wing of the Democratic Party—is expected to form a cabinet mixing politicians and technocrats. His cabinet is due for a vote of confidence by the end of the week.

The end of the crisis began to take shape last weekend when 87-year-old Napolitano was re-elected by Parliament, an unprecedented event in the Italian Republic.

The impasse had persisted since the parliamentary election in February, when the PD won the largest bloc in the Chamber of Deputies but failed to secure a majority in the Senate. Since then, the center-left party had been unable to forge an alliance with its rivals.

Upon accepting the nomination, Letta expressed surprise and stressed that the country faces a "difficult and fragile" situation. According to him, the country needs to address unemployment, poverty, and the difficulties faced by small businesses. He also criticized European authorities for placing excessive importance on fiscal austerity rather than growth.

There was widespread expectation that Napolitano would nominate former Prime Minister Giuliano Amato, but apparently he preferred a figure with greater political experience, reflecting a generational shift in Italian politics.

The new government will be supported primarily by the center-left bloc and the center-right bloc of Silvio Berlusconi.

Letta is 46 years old and currently holds a parliamentary mandate, unlike Amato, who is 74. Fluent in English, he will be the second youngest prime minister in Italian history. His strong support for association with the European Union should be well received by markets and foreign governments.

In recent days, the prospect of a solution to the crisis had already been encouraging the markets. On Wednesday, interest rates on Italian public debt fell to their lowest level since the beginning of the European monetary union in 1999.

But Italy's problems are not over, and significant differences remain between the right and left regarding economic policy. Before Letta's nomination, the leader of Berlusconi's PDL party in the Chamber, Renato Brunetta, said he would only support a government that committed to repealing a hated housing tax, reimbursing those already paid.

The center-left only wants a partial reduction, and many economists say that ending the tax would leave a hole in public finances.

But Napolitano, who reluctantly accepted a new presidential term, made it clear that he will no longer tolerate the endless infighting between the parties, and threatens to resign if they do not unite around economic policies and important constitutional reforms.

The main one is the repeal of the problematic electoral law, which was largely responsible for the impasse that arose in February.

(Additional reporting by Paolo Biondi and Steve Scherer)