The move caps a two-decade political career that has ended with
Italy on the brink of being swept into Europe's debt crisis.
Mr Berlusconi met for about an hour with Italian President
Giorgio 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 today 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 per cent. A rate of over 7 per cent 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 tonight 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.
The most widely discussed name to lead a technical government is
Mario Monti, the former EU competition commissioner, though Mr
Berlusconi's right-hand man, Gianni Letta, and the head of his
political party, Angelino Alfano, have also been mentioned - and
rejected by the opposition.
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 had previously said he wouldn't run for a fourth
term, but nothing would preclude him from presenting himself as a
candidate.
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.
Going into the vote, even Mr Berlusconi's top ally Umberto Bossi
of the Northern League urged the premier to leave.
"We asked him to step aside," said Mr Bossi, the volatile ally
who brought down Mr Berlusconi's first conservative government in
1994. Mr Bossi said Mr Berlusconi should let his hand-picked
successor, former Justice Minister Angelino Alfano, lead the
government.
Italy is the eurozone's third-largest economy, with debts of
around €1.9 trillion (£1.63 trillion). Representing 17 per cent 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 (£257 billion) in 2012 alone - just as interest rates
for it to borrow have been soaring.
Mr Berlusconi last week took the humiliating step of asking the
International Monetary Fund to monitor the country's reform efforts
in a bid to reassure markets.
On Wednesday, a separate European Union monitoring mission is to
begin work in Rome to review measures taken so far.
The EU's questionnaire put to Italy ahead of the mission says
"additional measures" will be needed beyond what Italy has pledged
to do, to balance the budget by 2013, according to the text shown
on Italy's Sky TG24.
"The economic and financial situation of Italy is very worrying
and we want to help Italy through our rigorous surveillance," said
EU Monetary Affairs Commissioner Olli Rehn.
Business leaders once enthusiastically backed the media mogul's
leadership, but now some say his government has failed to revive
Italy's stalled economy.
"(Italy) cannot go forward" with the soaring spread. "The
country cannot stay in these conditions," said Emma Marcegaglia,
who leads an influential Italian business lobby.
Others, like the CEO of Italy's second-largest bank, Intesa
Sanpaolo SpA, expressed confidence in Italy's ability to navigate
the debt crisis.
Intesa is heavily exposed to Italian bonds, and has seen its
share price drop 45 per cent in the last year amid worries over its
exposure to bad European government debt.
Corrado Passera conceded that widening spread between Italian
and German borrowing rates is "certainly a cause for concern." But
he expressed optimism that Italy would be able to refinance its
debts, emphasising Italy's primary surplus, low family and business
indebtedness, strong manufacturing sector and high level of public
and private assets.
The opposition centre-left has long demanded that Berlusconi
resign, citing sex scandals, criminal prosecutions and legislative
priorities it says are aimed at protecting the premier's own
business interests rather than those of the country. However, it
has failed to come up with a leader and programme to energise its
base.
Jan Randolph, head of sovereign risk analysis at IHS Global
Insight, said Mr Berlusconi's resignation would bring a short
relief rally to the markets.
"But Italy will not be out of the heat of bond markets until a
solid and stable government actually implements austerity and
undertakes reforms with strong credible leadership," he said.
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