5-Star, League want European Central Bank to forgive €250 billion of Italy debt

Far From Target       Both Italy and Greece have debt-to-GDP ratios that have widened in recent years              Source Eurostat

In a direct challenge to European Union fiscal rules, the draft accord also called for the bloc to create fiscal headroom for spending by adjusting the formula used to calculate Italy's debt burden, which the rules say must be reduced.

Leaders of the far-right League and the 5-Star Movement, which emerged as two of the biggest parties from an inconclusive election on March 4, have been discussing a common policy agenda to form a coalition government and end more than 10 weeks of stalemate.

US 10-year Treasury yields rose, extending this week's bond market selloff, as traders and investors have not reached a consensus on whether it was time to buy or if the market was vulnerable to more selling.

"It's right to resonate with markets because it tells you about the sense of the wisdom between these negotiating parties", said Chris Scicluna, head of economic research at Daiwa Capital Markets. Italians are sick of the austerity associated with euro membership, and "will not tolerate" another round of it.

In bond markets, the USA 10-year Treasury yield set a fresh seven-year high of 3.108 percent in Asian trade on Thursday.

US bond yields have risen after data this week showed a solid rise in USA retail sales, suggesting the US economy is on a stronger footing in the second quarter.

This spread, a closely watched indicator of relative risk, was 129 bps on Tuesday.

But it would also mean that Italy's borrowing costs would rise sharply on concern about long-term debt sustainability.

The benchmark 10-year US yield US10YT=RR hovered above 3.1 percent, continuing a surge higher earlier in the week.

"We are seeing the latest, unacceptable interference from an unelected official in Europe", said Salvini.

5-Star, League want European Central Bank to forgive €250 billion of Italy debt

But unease was evident across Italian markets.

The pan-European FTSEurofirst 300 stock index .FTEU3 rose 0.51 percent.

Shares in Italian banks, considered a proxy for political risk in the country due to their large holdings of government bonds, were broadly lower and the sectoral index was on course for its worst day in five months, down 2.9 percent.

Benchmark 10-year notes US10YT=RR last fell 5/32 in price to yield 3.1112 percent, from 3.095 percent late on Wednesday.

Spot gold XAU= dropped 0.1 percent to $1,288.96 an ounce, touching a new low for the year during the session.

These include slashing taxes for companies and individuals, boosting welfare provision, cancelling a scheduled increase in sales tax and dismantling a 2011 pension reform which sharply raised the retirement age. It might also dismay Italian President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance.

The League's support largely is centered in northern Italy, where it backs lower taxes and reining in central government spending, a popular platform in Italy's most productive region.

Some analysts, however, see the headlines as mostly noise and think the proposals are likely to be moderated by Mattarella. Global trade deals "excessively weaken the defense of citizens' rights and damage fair competition to the detriment of domestic market sustainability", their joint draft says.

A Five Star/League government has always been seen as the most disruptive scenario for eurozone leaders.

It would also be Italy's first all-populist government.

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