Italian Prime Minister Silvio Berlusconi says he will not run if Italy holds early elections.
After failing to secure the majority in a vote in the lower house on November 8, Berlusconi pledged to stand down once parliament passed budget reforms.
The reforms were demanded by European partners to help Italy stave off a debt crisis that is threatening the eurozone. Votes to pass the reforms in both houses of parliament are likely this month.
But President Giorgio Napolitano has said he would start consultations with political parties on the way forward only after the new austerity measures are approved.
Berlusconi and his center-right party want early elections, while the opposition has called for a national unity government.
Meanwhile, the price Italy pays to borrow on international financial markets hit new record highs amid the political uncertainty.
Borrowing rates on Italian 10-year government bonds topped 7 percent on November 9, a benchmark after which investors become unwilling to lend because of fears they will not get their money back.
The 75-year-old Berlusconi has been under pressure for weeks, plagued by a string of sex and legal scandals, political losses, and mounting doubts about his ability to lead Italy as it struggles to contain its massive debt.
But the prime minister, who has dominated Italian politics for nearly 20 years, had refused to heed his opponents' calls to step down.
Those calls were repeated in parliament on November 8 by opposition Democratic Party leader Pier Luigi Bersani, who addressed Berlusconi directly, saying: "If you still have some sense of responsibility toward Italy left inside you, please resign. We will take our own responsibilities. For our country, we will take our responsibilities.”
In the vote, the Italian parliament approved the 2010 state accounts, but dealt Berlusconi a humiliating blow in revealing that he no longer commanded a majority.
More than half of the lawmakers in the lower house abstained, depriving Berlusconi's center-right government of an absolute majority in the 630-member assembly.
In a phone call to Canale 5 TV, Berlusconi described the lower house of parliament as "paralyzed" and said it was vital to show the markets that Italy was "serious" about financial reform.
He added that the only realistic option as far as he could see was new elections.
That decision rests with the president, who said in his statement that he would "proceed with traditional consultations with maximum attention to the positions and proposals of every political force."
The opposition has accused the prime minister's government of lacking the political backing to handle the country's debt and boost growth.
Italy 'Too Big To Fail'
Democratic Party leader Bersani said Italy ran a real risk of losing access to financial markets after political uncertainty pushed yields on government bonds toward unsustainable levels.
Analysts say Italy, which is considered too big to bail out, is nearing the point at which Greece, Ireland, and Portugal had been forced to seek a rescue package.
The fear that Rome could begin failing to service its debt has prompted fears about the survival of the eurozone, already under intense strain from the Greek debt crisis.
Before the Berlusconi announcement, Olli Rehn, the EU commissioner for economic and monetary affairs, said Italy's financial concerns had prompted the bloc to dispatch an observatory mission, as agreed at last week’s G20 summit in Cannes.
"The economic and financial situation of Italy is very worrying, and we want to help Italy through our rigorous surveillance and therefore we are sending our mission to Rome," he said.
Rehn also said that the government needed broad-based support from its citizens for its program of debt reduction.
"I trust that political stability will be restored [in Italy]. It is not certainly harmful if there is a broad based societal consensus in any society when facing such major challenges -- economic and financial and social challenges -- as Italy is facing," he said.
However, even when Berlusconi goes, there is no guarantee that the reforms demanded by the EU reforms will be quickly implemented or that calm will return to investors.
There is currently no agreement among political parties on either a national unity or technocratic government and the president’s consultations may be difficult.
Still, following the announcement global equities and the euro rallied on hopes that a new leader will act more aggressively to tackle Italy's debt problem.
compiled from agency reports