Italian borrowing costs soar

Italy's president responded by declaring there was no doubt that Mr Berlusconi would leave soon, appearing to soothe investors.

In another chaotic day driven by the European debt crisis, the Dow Jones industrial average dropped nearly 240 points in New York after Italy's borrowing costs soared to a new record high.

Traders were troubled by signs that Europe's unending debt crisis was enveloping Italy - the eurozone's third-largest economy, a nation too big for Europe to bail out.

And in Greece MPs laboured for a third day but finally came up with a deal to create an interim government to pass the country's new debt deal. Outgoing Greek prime minister George Papandreou wished the next prime minister well but gave no indication of who it would be.

Mr Berlusconi has pledged to resign after the Italian parliament passes the financial reforms that European officials have been demanding for months. The process can take up to two weeks, but President Giorgio Napolitano said that would be accelerated to days, allowing him to quickly begin talks on forming a new government or calling new elections.

"Fears are totally unfounded that Italy may experience a long period of inactivity," Mr Napolitano said, adding that "emergency measures" could be adopted at any time.

Italy's key borrowing rate hit a high of 7.40% as markets expressed concern about how swift and complete Italy's political transition would be. That is over the level that eventually forced other eurozone countries like Greece and Portugal to seek bailouts.

They settled down to 7.26% after Mr Napolitano's remarks.

With debts of £1.6 trillion, Italy is considered too big for Europe to bail out. Higher borrowing rates will make it more difficult and expensive for Italy to roll over its debts.

The European Central Bank has been buying up Italian bonds to keep yields at reasonable rates - but critics say that is just throwing good money after bad.

Italy needs to pass the additional austerity measures and structural reforms pledged by Mr Berlusconi to world leaders at an economic summit last week.

Any delays in the financial reforms or in establishing a new, stable Italian government frighten the markets, which are already unnerved since some investors in Greece are going to lose 50% of their holdings. Investors fear a so-called "haircut" could also affect those owning Italian bonds if Italy doesn't get its act together.

In the meantime, Mr Berlusconi is not yet out - and there is considerable uncertainty of what kind of government will follow.

While Mr Berlusconi is not running for office again, he said he would remain active as the founder of his political party and would help out in any political campaigns.

Mr Berlusconi wants new elections soon with his hand-picked successor, former justice minister Angelino Alfano, as a candidate. The 75-year-old leader tapped Mr Alfano to head his People of Liberties Party a few months ago. At 41, he represents a new generation of centre-right politicians after 17 years of Berlusconi leadership.