Italian Premier Silvio Berlusconi promised tonight to resign after Parliament passed economic reforms demanded by the European Union.
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.Reuse content