Italy's 87-year-old President Giorgio Napolitano will face the greatest test of his career during his final weeks in office as he tries to end the standoff preventing a new government being formed more than a month after elections.

Following reports he may resign to open the way for a new vote, Mr Napolitano pledged to remain in office until his term ends on May 15, averting the immediate threat of further turmoil.

He named 10 "wise men" including European Affairs Minister Enzo Moavero and senior politicians from the main centre-left and centre-right blocs to propose a series of urgent measures that could be backed by all parties.

Details will be announced tomorrow but are expected to include cutting the cost of the bloated political system and replacing the electoral law to avoid a repeat of the deadlock.

Valerio Onida, the former head of the Constitutional court who is part of the advisory group, said "It would be a disaster to go back to an election without having reformed the electoral law."

With financial markets already concerned about instability in the eurozone's third-largest economy, the prospect of Mr Napolitano leaving raised alarm and moves to escape the impasse received a cautious welcome from commentators yesterday.

Enrico Letta, deputy head of the centre-left Democratic Party said: "It was the right decision.

"It will avoid sending a dangerous signal to the markets and will show Italian institutions are solid and functioning."

However, there were few illusions that this offered more than a slim hope of overcoming the deep divisions that have prevented the parties from coming to an agreement.

Daniela Santanche, a member of parliament close to former prime minister Silvio Berlusconi, said: "Political history shows, alas, that whenever someone wants not to decide something, what happens? They set up a nice commission."

She said there was no alternative to Mr Berlusconi's demand to share power in a coalition with the centre-left formation.

She added: "Otherwise we go to elections, which we're sure of winning. There won't be any strange third ways."

Mr Napolitano won wide respect in Italy and Europe for his handling of the 2011 political and financial market crisis which brought down the last Berlusconi government.

It was reported yesterday that European Central Bank President Mario Draghi called Mr Napolitano to express concern his resignation would leave Italy without leadership at a time of tension in financial markets.

But Napolitano has acknowledged he has only limited power to force the parties to find a way out of political situation he said was "frozen between irreconcilable positions".

The three main blocs in parliament – Pier Luigi Bersani's centre-left, Berlusconi's centre-right alliance and Beppe Grillo's anti-establishment 5-Star Movement – have all clung to demands that have prevented any government being formed.

Mr Bersani, who won control of the lower house but fell short of the Senate majority that would allow him to govern, has ruled out a "grand coalition" with Mr Berlusconi while Mr Grillo refused a pact with parties he blames for Italy's social and economic crisis.

The deeply divided parliament, along with regional representatives, will soon elect Mr Napolitano's successor, who will have to oversee the birth of a new government or guide Italy into elections.

Mr Berlusconi, facing a verdict in his trial on charges of paying for sex with a minor as well as a decision on his appeal against a four-year sentence for tax fraud, has demanded the next president come from his side. He has threatened to take protests to the streets if he does not get his way.