By Barry Moody
ROME (Reuters) - An Italian political crisis that has rattled the euro zone deepened on Wednesday when two party leaders ruled out the most likely options to form a government and avoid a new election.
Populist leader Beppe Grillo slammed the door on overtures from center-left boss Pier Luigi Bersani with a stream of insults while Nichi Vendola, Bersani's junior coalition partner, ruled out a government alliance with the center-right.
These two options are currently seen as the only way to avoid returning to the polls in short order after the February 24-25 election, in which a huge protest vote against traditional politicians and austerity policies plunged Italy into deadlock.
The prospect of prolonged uncertainty in the euro zone's third-largest economy caused sharp falls on world markets immediately following the election result, but they calmed on Wednesday after solid demand for Italian government debt at an auction, with European bonds, shares and the euro all boosted.
The center-left took the most seats in the poll but no single group has a big enough majority to rule.
Grillo's anti-establishment 5-Star Movement blocked center-left control of parliament after one of the biggest populist victories in recent European history.
Bersani put out cautious feelers to Grillo on Tuesday, suggesting there could be agreement on a short list of measures common to both sides.
But he said those supporting a center-left government would have to back it in a confidence vote, which would be essential before it could be installed.
"DEAD MAN TALKING"
Grillo responded on his blog by calling Bersani a "dead man talking" and a political stalker, accusing him of making "indecent proposals" and calling on him to resign. The center-left slumped to well below the winning majority that opinion polls had predicted.
Grillo said 5-Star would not give a vote of confidence to the center-left or anybody else, but would support laws that reflected its own programme to abolish a despised electoral law, slash the privileges of a discredited political class and remove public funding from the parties.
With Grillo refusing to support a center-left government, the only other option on the table appears to be an alliance between Bersani and the center-right of Silvio Berlusconi, but that would probably have a very limited shelf life amid wide disagreements on policy.
Even that option receded on Wednesday after Vendola, leader of the leftist SEL party, ruled it out in a statement after meeting Bersani.
Vendola said he hoped Grillo didn't want a right-left alliance either and called for a government that would give the country an "electric shock" - a possible new bid to win support from the Genoese stand-up comic for the center left.
Angelino Alfano, secretary of Berlusconi's People of Freedom party, reacted angrily on Tuesday to reports that Bersani was seeking to form an alliance with Grillo, reflecting center-right concern at being shut out of power.
The sensitivity of Italians over widespread European incredulity at both the rise of Grillo and resurgence of Berlusconi was underlined when President Giorgio Napolitano canceled a dinner with the German opposition candidate for chancellor after he called the two men "clowns". [ID:nL6N0BR8GT]
Apart from Grillo's extraordinary rise - he took 25 percent of the vote compared to only 1.8 percent in a local election in 2010 - Berlusconi's shock comeback from scandal and humiliation was the biggest feature of the vote. [ID:nL6N0BQCLG]
Wounded by a lurid sex scandal involving alleged orgies at his Milan villa, Berlusconi was driven from power in November 2011 as Italy's borrowing costs reached unsustainable levels. He was replaced by the technocrat Mario Monti.
But the billionaire media showman clawed back support after joining the election campaign in December with an unrelenting attack on Monti's hated tax policies while Grillo mocked the stiff former European commissioner, calling him "Rigor Montis."
The center-right came within a whisker of winning more parliamentary seats than the Bersani's coalition.
Napolitano has the task of trying to find a coalition government to rule Italy. But under various institutional rules, the post-election parliament must be seated and elect its house presidents before the head of state begins formal consultation with political leaders.
This is not expected until at least March 18, leaving Italy in limbo until then despite a political crisis that is delaying measures to tackle the longest recession for 20 years, soaring unemployment and one of the world's biggest public debts.
To add to the uncertainty for Italians, Pope Benedict abdicates on Thursday and Napolitano's own mandate ends in mid-May.
The 87-year-old former communist is widely respected and has taken a key role in political developments. He is widely believed to have engineered the replacement of Berlusconi by Monti.
The technocrat premier quickly restored investors' confidence with a series of tough austerity measures, but struggled to pass key reforms to boost economic growth.
He was an easy target for Grillo and Berlusconi during the campaign when his foray into frontline politics was largely a failure. His centrist group won only 10 percent of the vote.
(Editing by Giles Elgood)