ROME, Aug 30 (Reuters) - Italy's 5-Star Movement will only enter a coalition with the opposition Democratic Party (PD) if it agrees to a string of policy demands, the 5-Star leader said on Friday, setting an uncompromising tone for the negotiations.
Luigi Di Maio's hardline message dented growing optimism that a deal might be at hand, and a surprised PD sought immediate clarification that 5-Star still wanted an accord.
The previous coalition made up of 5-Star and the far-right League collapsed earlier this month when League leader Matteo Salvini withdrew from the alliance hoping to trigger an early election and cash in on his surging popularity.
But his move backfired when 5-Star and the PD unexpectedly said they would be willing to try to lay aside old animosities and forge a new coalition, with Conte remaining at the helm.
However, Di Maio struck a seemingly intransigent line following an initial round of talks with Conte, saying the PD would have to back an array of policies if it wanted to govern -- including measures the group has already denounced.
"Our programme points are clear. If they are included in the government programme, then we can start. If not, it would be better to go back to elections, and, I might add, as soon as possible," a stony faced Di Maio told reporters.
Amongst the measures he mentioned were a drive to cut the number of parliamentarians, the revocation of the motorway concession of Italian firm Atlantia and the acceptance of a recent law aimed at clamping down on migrant sea rescues.
The PD deputy leader Andrea Orlando described Di Maio's remarks as "incomprehensible".
"Have you changed your mind? Say it clearly," he wrote on Twitter.
Financial markets had welcomed Conte's re-appointment by the head of state earlier this week as a sign that early elections could be avoided. Italy's 10-year borrowing costs have dropped to an all-time low and the blue-chip index was on course for its best weekly performance in six months.
A 5-Star/PD tie up was also seen as likely to soothe Italy's fractious ties with the European Union, after a series of spats over public spending orchestrated in part by the eurosceptic League.
If the talks between 5-Star and PD fall apart even before a government can take office, President Sergio Mattarella will have to call elections some 3-1/2 years ahead of schedule.
On accepting the mandate to form a government Conte said his priority was to draft a 2020 budget that averted the VAT hike, protected savers and offered solid prospects for economic growth and social development.
Currently, VAT will rise from Jan. 1 unless the government can find 23 billion euros ($26 billion) elsewhere.
Salvini had promised swingeing tax cuts for 2020 that economists warned could put unsustainable pressure on Italy's towering debt mountain.
Additional reporting by Valentina Consiglio, Gavin Jones in Rome; Writing by Crispian Balmer; Editing by Jon Boyle