Prime Minister Silvio Berlusconi's departure would open a period of intense uncertainty for Italy that offers no speedy solution to a debt crisis threatening the whole euro zone.
Italian assets rallied briefly on rumours Berlusconi was ready to quit on Monday, but there will be no sustained market reversal until he is replaced by a stable government seen as capable of shoring up public finances and tackling reforms.
That may be a long time coming, and perhaps the biggest risk since its bond yields began to rise in the summer is how long Italy takes to deal with its problems.
Even with the exit of a man who came to symbolise scandal and empty promises, it will not be easy for Italy to convince markets it can cut its huge debt, liberalise the labour market, attack tax evasion and boost productivity -- just for starters.
In the meantime, Italy's partners and financial markets will want to know what will become of the vague reform pledges made by Berlusconi to the European Union last month.
None of the scenarios that may play out when the 75-year-old media tycoon goes are straightforward.
The current make-up of the Italian parliament and the intentions of the government coalition suggest that a rapid solution of the political crisis is unlikely, said Mizuho's Chief European Economist Riccardo Barbieri.
A worst-case scenario could see weeks or months of instability and continued reform inertia.
Italy's benchmark bond yields are at an unsustainable level well above 6 percent and would be far higher without support from the European Central Bank. Funding needs are modest for the next two months but will rise sharply going into the new year, as major debt redemptions are due in February and March.
Analysts say the economy is already in yet another recession, will muster hardly any growth in 2012, and the government's fiscal deficit targets will be missed.
Markets want an unelected technocrat government appointed to pass unpopular reforms needed to improve growth potential in one the world's most chronically sluggish economies.
This would be most likely to trigger a favourable re-assessment of Italy in the minds of international investors, said Nicholas Spiro, head of debt consultancy at Spiro Sovereign Strategy.
Analysts said that technocrat governments led by Giulio Amato and central bankers Carlo Azeglio Ciampi and Lamberto Dini in the 1990s passed important reforms and got Italy out of even more acute market crises than the present one.
Former European Commissioner Mario Monti is often tipped to lead such an administration, but it is far from clear if it could muster a majority in parliament. Berlusconi would do all he can to boycott what he sees as a subversion of democracy, backed by his allies in the pro-devolution Northern League.
Even after the defections that seem set to bring him down, Berlusconi's People of Freedom party will probably still be the largest in parliament and it would require a huge mutiny against him for an unelected government to get the support it would need.
So President Giorgio Napolitano is likely to have no option but to dissolve parliament and call elections, but not before he has consulted all the political parties and possibly asked Monti or someone else to verify themselves whether they can muster the backing to form a government, requiring more valuable time.
Elections could be held in January at the earliest, leaving Berlusconi to continue in the meantime as caretaker leader of a lame-duck government overseeing more policy inertia.
Polls suggest an election would be won by the centre-left opposition, offering little prospect of decisive government from a broad grouping of parties with no obvious leader or any consensus on the policies needed to save Italy from its crisis.
Moreover, the election campaign would be unpredictable and fiercely contested, unlike the situation in Spain, where the opposition People's Party seems headed for a landslide, making its leader Mariano Rajoy virtually a prime minister in waiting.
Berlusconi will not run for prime minister again, but will want to anoint a successor as centre-right leader, and recent comments suggest he will fight the campaign on a fiercely anti-euro platform, blaming the single currency for Italy's woes.
In two separate news conferences over the last few weeks he first called the euro a peculiar currency that hasn't convinced anyone, and then said its introduction had impoverished large sections of Italy's population.
(Editing by Louise Ireland)