Italy's Prime Minister-designate Mario Monti concludes consultations on Tuesday to form a new government, one he hopes will last until 2013 and sort out Italy's deep economic problems.

The former European Commissioner, who was appointed on Sunday, spent his first full day on the job in talks with smaller parties.

On Tuesday morning he meets delegations from the two biggest blocs -- Silvio Berlusconi's PDL and the leftist Democratic Party -- as well as unions and representatives of youth and women's groups.

Monti, whose government will try to reverse a disastrous collapse of market confidence in Italy, said the first day of talks had been constructive, and that politicians understood the seriousness of Italy's situation.

But he also said his government should last until the next scheduled elections in 2013, in contrast with widespread predictions that he will have to make way for early elections once he passes the reforms promised to Europe.

The time frame in which the government is placing itself is between now and the end of the legislature in spring, 2013, he told a news conference. It's obvious that parliament can decide at any time that a government does not have its confidence.

Monti said he would be willing to have politicians in his government instead of just technocrats but that it would be up to the political parties to decide.

His first day of work followed a frenetic weekend in which Italy's parliament approved economic reforms agreed with European leaders and Berlusconi resigned.

Monti could present his new government as early as Tuesday night but it more likely to be on Wednesday.

The speaker of the lower house, Gianfranco Fini, said he expected Monti to seek a confidence vote in parliament to confirm support for his new government by Friday.

FRAGILE STATE OF MARKETS

Initial market reaction was positive on Monday, with both stocks and bond markets lifted.

But in a sign of the fragile state of the markets, the trend was reversed after an auction of 5-year bonds forced the Treasury to pay a record yield of 6.29 percent, up nearly a full percentage point from the last auction in mid October.

By the early afternoon, the risk premium on Italian bonds over their benchmark German equivalent was up to 482 basis points, underlining the threat that still hangs over Rome.

Last week, Italy's borrowing costs rose to the kind of levels that forced Ireland and Greece to seek an international bailout.

The man who tapped Monti, President Giorgio Napolitano, has called for an extraordinary national effort to win back the confidence of international markets, noting that Italy had to refinance some 200 billion euros (171 billion pounds) of bonds by the end of April.

When he makes his first speech to parliament this week, Monti is expected to outline a policy programme in line with demands made by Italy's European partners.

A convinced free marketeer with a record of successfully taking on powerful corporate interests during his decade in Brussels, Monti has spoken frequently of his support for controlling public finances.

He also supports policies such as boosting competition, opening up closed professions and lowering the tax burden on employment.

Top European Union officials and German Chancellor Angela Merkel have welcomed signs of an end to the weeks of uncertainty, with Merkel saying the approval of a reform package in parliament on Saturday was heartening.

(Reporting By Philip Pullella and Michael Roddy)