Kosovo's two biggest parties have agreed "in principle" to form a coalition government, the president of the semi-autonomous territory has said, signalling an end to more than five months of damaging political deadlock and accusations of government corruption.

President Atifete Jahjaga said in a statement late on Wednesday that the prime minister and main opposition leader have pledged to form a government.

Jahjaga said that premier Hashim Thaci's Democratic Party (PDK) and Isa Mustafa's Democratic League (LDK) had agreed to try to overcome the situation that has threatened to send the country into bankruptcy as its politicians have been unable to vote on the budget.

"Thaci and Mustafa agreed in principle to form a coalition between PDK and LDK, to build institutions of the Republic of Kosovo," Jahjaga said.

The statement was released after Thaci and Mustafa met in Jahjaga's office in the presence of the US Ambassador to Kosovo, Tracey Ann Jacobson.

The deal is likely to upset other opposition parties that had sided with Mustafa in a bid to oust Thaci from government, following allegations of high level corruption and an international investigation into organ trafficking.

Following June 8 elections, four opposition parties, led by the LDK, formed a block aimed at blocking Thaci's third mandate and pledged to form their own coalition.

But the coalition block did not succeed in preventing the PDK's choice for a speaker, which in turn prevented them from forming their own government.

It is expected that parliament will convene by the end of the week when a vote on the coalition will take place.

Thaci led Kosovo's ethnic Albanian fighters during the 1998-99 separatist war against Serbia. Serbia rejects Kosovo's 2008 secession.

Source: Agencies