The political paralysis -- which centered largely on what to do with former Prime Minister Silvio Berlusconi, whose People of Freedom Party finished a strong second in polling to the center-left Democratic Party -- had unnerved financial markets in Europe and around the world.
Prime Minister-designate Enrico Letta, leader of the Democrats, met with President Giorgio Napolitano, serving an unprecedented second consecutive term, to hammer out the deal.
Berlusconi himself will not serve as a Cabinet minister, but several of his party's top leaders were handed important jobs, ANSA News Agency said.
Angelino Alfano, the PDL's secretary, will become deputy prime minister and interior minister in the new government.
Fabrizio Saccomanni, the Bank of Italy director, will be the new finance minister and immediately tasked with addressing the nation's burgeoning debt crisis.
ANSA said Berlusconi, who is still facing charges of tax fraud and sex with an underage prostitute, has seen an uptick in his approval ratings of late, which gave him more leverage in negotiations. He steadfastly opposed a new income tax aimed at helping pay down the nation's debt. Letta said he will shift the focus away from austerity to address the nation's economic woes.