Exit polls show billionaire Berlusconi's center-right coalition falling short, with between 45 and 49 percent of the vote, and former premier Romano Prodi's center-left winning between 50 and 54 percent. Official turnout was put at 83.6 percent for the elections, which were held yesterday and today.
However, pollsters warned that Prodi's lead in the upper house Senate was diminishing, and that Berlusconi was showing unexpected support in key northern regions. Prodi has yet to declare victory.
But analysts were less cautious, predicting a Prodi victory -- and a collective sigh of relief across Europe over Berlusconi's defeat.
Simon Serfaty, a European affairs analyst at Washington's Center for Strategic and International Studies, predicted a Berlusconi loss won't be a disappointment to many.
"On the whole there will be widespread satisfaction over Berlusconi's departure, absolutely," he said. "His closest ally within the EU was probably Tony Blair, and I doubt that Blair took Berlusconi as seriously as Berlusconi himself hinted. Elsewhere, there have been significant tensions between all of the heads of state and government and the Italian prime minister."
Like other analysts, Serfaty noted that Berlusconi was extremely unpopular among fellow EU leaders -- and not just because he seemed to put his relationship with U.S. President George W. Bush over and above Italy's ties with its fellow EU governments.
"[It was] his attitude, his unpredictability, his occasional bursts -- anti-Muslim rhetoric, etc. The fact, most of all, beyond personality, that Italy is facing serious problems, is facing a serious economic crisis," Serfaty said. "The past few years have not been very successful for Italy, and there is a sense now that somebody else had to come to the helm."
Since Italy's richest man became prime minister, its economy has stagnated, growing just 0.6 percent a year -- hardly what the media tycoon had promised Italians back in 2001.
A Pre-Election Vow To Withdraw Troops From Iraq
Christopher Winner is an American journalist who has lived in Rome for nearly four decades. He says that despite Berlusconi's widely unpopular decision to support the U.S.-led war in Iraq, it was the widespread discontent with the economy that drove Italians to seek an alternative.
"Perhaps a new face will improve the economy somewhat. That's what this matter is about. It is not about Iraq, it is not about foreign policy, it is not about even specifics of domestic policy outside of taxes, which is true of any
country's elections. Let's just hope that somebody else at the top might make things a little bit easier for the common Italian, the working Italian."
Prodi, however, faces a daunting task. His coalition includes several parties, such as the Refounded Communists, that disagree on key issues, particularly foreign policy.
During the election campaign, Prodi said that if elected he would withdraw Italy's 3,000 troops from Iraq as soon as possible.
But Giovanni Gasparini, a defense and foreign policy analyst at Rome's Institute of International Affairs, says that's unlikely to happen.
"I don't see the government pulling out any time soon. It will be part of our bilateral talks with Washington; there are also technical questions involved in the timing. And the Iraqi government will definitely be involved in this as well and understand whether the military mission can be replaced with another one, not just Italian but one with wide participation.
Communist Allies Could Be Spoilers
It could be in the same area, but not so much military as one that supports the local population and development."
Prodi has vowed to realign Rome's foreign policy with that of France and Germany, after five years of unwavering support for the United States.
But Gasparini and others say Prodi's unruly coalition could run into problems in the event of a major international crisis in which Italy is again called on by its American allies to take part in a military effort, such as in Iraq.
"Clearly, when the center-left is facing some tough questions, such as the use of force in general, or American foreign policy toward the Middle East, perhaps involving Iran, then there will certainly be a crisis," Gasparini said. "That's because the Refounded Communists have already come out very strongly against any [military] action of that kind."
Prodi beat Berlusconi in a 1996 election, but his government lasted only two years before it was brought down by the same communist allies.
The 66-year-old Prodi, however, says his government could last the entire five-year term this time because its partners have agreed on key economic policies. They include cutting labor taxes, providing handouts for families with kids, scrapping plans to raise the age of retirement to 60 and cracking down on tax evasion.
The next government is not expected to take office for at least a month, with Berlusconi set to stay on in a caretaker capacity until parliament nominates a successor to President Carlo Azeglio Ciampi, whose mandate expires in May.