FILE PHOTO: Anti-establishment 5-Star Movement leader Luigi Di Maio speaks following a talk with Italian President Sergio Mattarella at the Quirinal Palace in Rome
By Giuseppe Fonte and Steve Scherer
ROME (Reuters) - Italy's two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago.
Leaders of the far-right League and the 5-Star Movement, which emerged as two of the biggest parties from an inconclusive March 4 election, have been discussing a common policy agenda for a coalition government and end more than 10 weeks of stalemate.
5-Star leader Luigi Di Maio said he and League chief Matteo Salvini had completed their review of the program drawn up by party officials and they would present it to President Sergio Mattarella by Monday.
A 5-Star source had said the program contained no reference to a possible exit from the euro or "anything that could cause any concern regarding Italy's euro membership".
Both parties have a history of euroscepticism. 5-Star has moderated its position over the last year, but the League still wants to leave the euro zone as soon as politically feasible.
The accord has yet to be made public and still needs to be ratified by both parties' members as well as approval by Mattarella. The parties had made progress on agreeing a prime minister, Di Maio said, but he did not give a name.
Salvini said the new premier would be neither him nor Di Maio.
A draft of the accord reviewed by Reuters earlier on Thursday spelt out a plan to cut taxes, increase welfare payments for the poor and scrap an unpopular pension reform which seems incompatible with EU rules on fiscal discipline.
The policies would cost many billions of euros and have spooked investors in Italian debt, shares and the euro. Italy is the euro zone's third-largest economy.
News of the draft accord has caused concern in Brussels, where European Commission Vice President Valdis Dombrovskis told the EU parliament on Thursday that Italy's new government should stick to fiscal discipline and keep reducing public debt.
Italy's borrowing costs have been rising as details of the accord emerge, though they stabilized after a sell-off on Wednesday. Italy's main share index closed up 0.3 percent and the gap between the yields on Italy's benchmark bonds and safer German bonds retreated after briefly widening on Thursday to their widest since early January.
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Ratings agency DBRS warned that the parties' proposals could threaten Italy's sovereign credit rating and comments by the League's economics chief sparked a plunge in the share price of troubled bank Monte dei Paschi di Siena.
Claudio Borghi said Monte Paschi will remain in public hands following a bailout last year and branch closures planned by the outgoing center-left government would be rolled back.
Outgoing Prime Minister Paolo Gentiloni told EU leaders in Bulgaria that he and other leaders were worried that fundamental issues such as the need to safeguard public accounts were now up for political discussion.
French President Emmanuel Macron said the nascent Italian government was made up of "heterogeneous and paradoxical" forces, but expressed confidence that Mattarella would ensure Italy continued to work constructively in the EU.
Mattarella has repeatedly stressed the importance of maintaining a strong, pro-European stance.
The draft pact proposed a new "universal income" for the poor costed at 17 billion euros, while it said a planned softening of an unpopular pension reform would cost 5 billion.
The plan promised to introduce a 15 percent flat tax rate for businesses and two tax rates of 15 and 20 percent for individuals -- a reform long promoted by the League. Economists say this would cost well over 50 billion euros in lost revenues.
It was not clear when these and other measures would be adopted, and there was still no word on the thorny issue of who would be prime minister. Neither Salvini nor Di Maio wants the other to get the job.
(Additional reporting by Huw Jones, Crispian Balmer and Gavin Jones; Editing by David Stamp and Richard Balmforth)