Italian Premier Silvio Berlusconi has confirmed he will not run again for office and said his hand-picked successor Angelino Alfano will be his party's candidate when Italy holds new elections.
Mr Berlusconi yesterday promised to resign once parliament passes economic reforms demanded by the European Union to prevent Italy from being swept up further into Europe's debt crisis.
It will take a few weeks for both houses to pass the legislation.
Once Mr Berlusconi steps down, President Giorgio Napolitano must begin consultations to form a new government.
Mr Berlusconi wants elections in early 2012.
He told La Stampa: "I won't be a candidate, actually I feel liberated. It's Alfano's turn."
Mr Berlusconi met for about an hour last night with Mr Napolitano after losing his parliamentary majority during a routine vote earlier in the day.
In a statement, Mr Napolitano's office said Mr Berlusconi had "understood the implications of the vote" and promised to resign once parliament passes economic reforms designed to revive growth and control Italy's public debt.
A vote on the measures is planned for next week.
Mr Berlusconi's government is under intense pressure to enact quick reforms to shore up Italy's defences against Europe's raging debt crisis.
However, a weak coalition and doubts over Mr Berlusconi's leadership ignited market fears of a looming Italian financial disaster that could bring down the 17-nation eurozone and shock the global economy.
Italy's borrowing rates spiked yesterday to their highest level since the euro was established in 1999.
The yield on Italy's ten-year bonds was up 0.24 percentage point at 6.77 %. A rate of over 7 % is considered unsustainable and proved to be the trigger point that forced Greece, Portugal and Ireland into accepting financial bailouts.
In a dramatic shift from his usually defiant tone, Mr Berlusconi conceded last night he no longer had a parliamentary majority and would step aside for the good of the country.
"The markets don't believe that Italy is capable, or has the intention of approving these reforms," he told his private Mediaset television.
"Things like who leads or who doesn't lead the government" is less important than doing "what is best for the country," he said.
The president's office said that once he resigns, Mr Napolitano would begin political consultations to form a new government.
Mr Napolitano's statement made no mention of the possibility of elections, but Mr Berlusconi said he thought that was the best solution.
Mr Berlusconi's allies are keen to have new elections before Parliament can reform Italy's electoral system which has favoured the centre-right by giving the top vote-getting party a bonus of seats in the legislature.
The developments capped a convulsive day in the markets and in Italy's political circles after parliament approved the 2010 state accounts, but dealt Mr Berlusconi a withering blow by revealing that he no longer commands enough support to govern.
Mr Berlusconi garnered 308 votes of approval and none against in the Chamber of Deputies. But 321 deputies abstained from voting - most from the opposition centre-left - a tactic that laid bare his shrinking hold.
His margin was eight shy of the 316 votes he needs to claim an overall majority in the 630-member chamber.
"This government does not have the majority!" thundered opposition leader Pierluigi Bersani after the vote. "If you have a crumb of sense in front of Italy, give your resignation."
As Mr Bersani spoke, Mr Berlusconi scribbled his options on a piece of paper. An AP photo showed he wrote "resignation" and also "eight traitors," an apparent reference to former allies who had abstained.
Italy is the eurozone's third-largest economy, with debts of around 1.9 trillion euro (£1.63 trillion). Representing 17 % of the eurozone's gross domestic product, it is considered too big for Europe to bail out like Greece, Portugal and Ireland already have been.
Even worse, a substantial part of Italy's debt needs to be rolled over in coming months and years - the nation needs to raise 300 billion euro (£257 billion) in 2012 alone - just as interest rates for it to borrow have been soaring.