Italy's president has named a former IMF economist as caretaker prime minister to lead the country into new elections, possibly as soon as the autumn, after a political storm whipped up by the collapse of a populist bid for government.

The eurozone's third largest economy had lurched into a fresh crisis when President Sergio Mattarella yesterday vetoed the nomination of fierce eurosceptic Paolo Savona as economy minister in a planned coalition of the far-right League party and anti-establishment Five Star Movement.

His rejection of Mr Savona and nomination of Carlo Cottarelli as caretaker prime minister sparked angry calls for his impeachment as Mr Savona had the backing of the majority of politicians.

"This isn't democracy, this isn't respect for the popular vote. It's the latest slap in the face from the powers-that-be that says Italy should be a slave, scared and precarious," said League leader Matteo Salvini.

The chaos- the latest chapter in a drawn-out political saga after an inconclusive March election - sent Italian stocks tumbling by as much as 2% at one stage, and bond yields surging, with Italy's debt risk premium hitting its highest level since November 2013.

Mr Cottarelli, 64, was director of the IMF's fiscal affairs department from 2008 to 2013 and became known as "Mr Scissors" for making cuts to public spending in Italy.

He said that should his technocrat government win parliamentary approval, it would stay in place until elections at the "start of 2019". But if parliament fails to approve his government, a new election would be held "after August"

That is the most likely outcome given only the centre-left Democratic party has announced that it would vote in favour.

Mr Salvini and Five Star leader Luigi Di Maio furiously denounced the presidential veto, blasting what they called meddling by Germany, debt ratings agencies and financial lobbies.

The League and the Five Star, who together have a parliamentary majority, abandoned their plans to form a coalition government after the president's veto led to their approved nominee for prime minister, lawyer and political novice Giuseppe Conte, stepping aside.

Mr Di Maio denounced the replacement of "a government with a majority with one that won't obtain one" and called for the president to be impeached.

"I hope that we can give the floor to Italians as soon as possible, but first we need to clear things up. First, the impeachment of Mattarella ... then to the polls." 

Mr Salvini, a fellow eurosceptic who was Mr Savona's biggest advocate, said the anti-establishment government failed because the "powers-that-be, the markets, Berlin and Paris" had decided against "some of our ministers".

According to the Italian constitution, the president nominates both the prime minister and, following proposals from the premier, the cabinet. 

The most famous example of a president denying a choice of PM came in 1994 when Eugenio Scalfari refused then prime minister Silvio Berlusconi's choice of his own lawyer Cesare Previti as justice minister.

Yesterday, Mr Berlusconi showed support for Mr Mattarella's "safeguarding the interests of Italian families and businesses", which led his pre-election ally Mr Salvini to threaten to break their alliance if the billionaire media mogul voted in favour of the caretaker government.

But Giorgio Mule, parliamentary spokesman for Berlusconi's Forza Italia party, which won 37% of the vote in March alongside the League and two smaller far-right parties, said it would not approve Cottarelli's team.