LISBON (Reuters) - Two small far left parties have concluded talks with the moderate Socialists to create an alternative government and oust the centre-right, whose prime minister acknowledged on Friday he could be forced into opposition.
The prospect of a leftist government could have an effect on Portugal's timid economic recovery because of potential instability and the fact that the would-be partners reject some reforms imposed to escape a debt crisis.
The Communists and Left Bloc both said they had reached agreements with the Socialists for form a government with a majority in parliament.
The Left Bloc said "the conditions are in place for a left-wing agreement to protect jobs, salaries and pensions" while the Communists said a joint position was reached with the Socialists ensuring the formation of a lasting Socialist-led government.
Prime Minister Pedro Passos Coelho's austerity-minded government was sworn in last week after his coalition won the most votes in an election on Oct. 4, but lost its majority in parliament, which swung to the left.
The Socialists had warned earlier this week time was running out to reach an agreement with the leftists to form a government, which they had promised to have in place before trying to topple the new cabinet next week in parliament.
Speaking to reporters, Passos Coelho acknowledged for the first time that his government could be ousted.
"If I am not prime minister as of Tuesday it will be because the Socialists did not let me continue...I'll be where I am needed, in government which is the natural place for the one who won the election, but if I am potentially not in government but in opposition, I will assume my responsibilities," he said.
More than 100 entrepreneurs representing firms from cork-makers to motorways and construction, signed a manifesto arguing that uncertainty was already compromising investment, balance sheets and jobs, while a leftist government would only make things worse because the far left are opposed to private business.
Portuguese 10-year bond yields have risen more than 30 basis points since the election and rose to 2.69 percent on Friday, although they are still lower than a year ago and well below their 2012 crisis-time peak of over 17 percent.
The center-left Socialists have argued that they can form a government backed by a leftist majority that would respect European budget rules.
But the far left, especially the Communists, have in the past rejected Brussels-imposed budget limits and have various other significant ideological divergences. Some Socialists also favor a centrist coalition rather than a deal with the radical left.
The Communists' central committee will meet on Sunday.
The government agreed a legislative program on Thursday, which parliament will debate on Monday before a vote on Tuesday or Wednesday. If parliament rejects the program, which now looks very likely, the administration will fall.
The government said it was "permanently ready to compromise with the Socialists" to secure their support and ensure the governability of the country.
Reporting By Andrei Khalip, editing by Axel Bugge and Angus MacSwan