The president had balked at the populist parties' choice for finance minister, Paolo Savona, an 81-year-old who has been fiercely critical of the EU and has suggested Italy should abandon the euro.

In a concession, the parties proposed a new pick for finance minister, Giovanni Tria, a low-profile economics professor at the Tor Vergata University of Rome. Savona, meanwhile, will be shifted to European affairs minister.

Although technocrats will take some of the government's top jobs, most observers believe the leaders of the two parties - Five Star's Luigi Di Maio and the League's Matteo Salvini - will be the powers behind the new administration.

Both will officially be vice premiers, with Di Maio also taking the economic development ministry and Salvini running the interior ministry, which oversees law enforcement and border control.

Salvini, whose party ran on a stridently anti-immigration platform, has backed the mass deportation of migrants in a country that has become the top entry point for those crossing the Mediterranean to reach Europe.

Di Maio's party was founded by comedian Beppe Grillo less than a decade ago with the aim of shaking up a sclerotic political establishment and using the Internet to give voters a more direct say in their democracy. The party is considered a political chameleon, with shifting positions and influences from both left and right.

"Thank you everyone! The Government of Change is now real!" Di Maio wrote on Facebook late on Thursday.

Although the League and Five Star are sharply at odds on key issues, they share a scepticism toward the euro and the EU that has unnerved both the European establishment and investors.

Neither party ran its campaign on a euro exit. But after the president vetoed the parties' finance minister pick, the likelihood of new elections spawned fears that the populists would turn the next vote into a referendum on the country's membership in the currency club.

Thursday's agreement suggests that neither party wanted to go through with that - not right now.

"Just to be precise, we've never spoken about 'no euro,' never," Conte said on television. "On the opposite, that was never in the contract and was never an issue in the agenda."

The threat of a euro exit could have been deeply damaging to an economy that suffers from massive public debt and had seen its borrowing costs rise as markets grew anxious.

The new government will be under immediate pressure to improve economic conditions. Italy has struggled with low growth and high unemployment for the past decade.

Those woes have created political turmoil across southern Europe in recent years. Even as it eased in Italy on Thursday, it was building in Spain, where longtime Prime Minister Mariano Rajoy is expected to be forced out of office in a confidence vote on Friday.

Rajoy's center-right People's Party has been snared in corruption scandals, and on Thursday lost the support of a key ally. Rajoy is expected to be replaced by Pedro Sánchez, leader of the centre-left Socialists.

Washington Post