Premier Massimo D'Alema has resigned, opening up the possibility of early elections if no agreement is reached on a replacement.
The presidential palace said President Carlo Azeglio Ciampi accepted the embattled D'Alema's resignation, asking him to stay on in a caretaker capacity. Ciampi will begin formal consultations with the nation's political leaders on Thursday.
D'Alema tried to resign on Monday, but Ciampi rejected the offer, telling him to spell out the political situation in parliament first. D'Alema addressed the Senate, then met with the Cabinet before going to Ciampi to quit again.
The president can ask someone else from D'Alema's coalition to try and form a new government, he can appoint a nonpolitical caretaker or he can call immediate elections, a year before their scheduled date.
D'Alema's centre-left coalition was battered in regional elections last Sunday, bringing demands by the opposition for early parliamentary elections.
In his 20-minute speech to the Senate, D'Alema said Italy needed a strong government in the remaining 11 months of the legislature, suggesting reviving the alliance that has governed Italy for the past 18 months, and insisted that it was vital to go ahead with a May 21 referendum on changing the electoral system.
After 18 months as premier, D'Alema was paying the price for a humiliating defeat in regional elections last Sunday,
The victorious conservative forces, led by media magnate Silvio Berlusconi, kept up their calls for a general election, seeking to take advantage of the momentum.
"When a democratic country shows it has no confidence in its government, you form another one after free elections," Berlusconi said.
The centre-left is trying to hold on to power until it can regroup in time for elections next spring.
D'Alema leads a coalition ranging from hard-line Communists to liberal Christian Democrats.
In Sunday's balloting, Berlusconi's centre-right alliance routed the centre-left, sweeping the affluent north and the region including Rome.
"Every time they lose, the left of yachts and fancy chefs looks at the middle classes in the north with surprised disgust," said a commentary in Turin's La Stampa newspaper.
The leadership of the Greens, another coalition partner, formally proposed Treasury Minister Giuliano Amato, a former Socialist premier, as their choice to lead the government to parliamentary elections next year.
Another name mentioned as a possible premier was Antonio Fazio, governor of the Bank of Italy.
Avoiding new elections could let a May 21 referendum go forward to reform Italy's electoral system. The referendum seeks to abolish the remaining 25 per cent of seats elected by proportional representation, blamed for the chronic instability of Italian governments. D'Alema headed the 57th government in the past 55 years.Reuse content