Italy's parliament gave final approval to a financial stability law on Saturday, paving the way for Prime Minister Silvio Berlusconi to resign and make way for an emergency government headed by former European Commissioner Mario Monti.
Berlusconi, who failed to secure a majority in a crucial vote on Tuesday, promised to resign once parliament passed the package of economic reforms, demanded by European partners to restore confidence in Italy's strained public finances.
He is due to hand in his resignation to President Giorgio Napolitano after a cabinet meeting that will mark the final act of the Berlusconi government and bring an end to one of the most scandal-plagued eras in Italy's post-war history.
Napolitano is expected to ask Monti to try to form a new administration to face a widening financial crisis which has sent Italy's debt costs to unmanageable levels and threatened to escalate into an emergency across the whole euro zone.
Monti, named by Napolitano as a Senator for Life on Wednesday, is expected to appoint a relatively small cabinet made up of technocrat specialists to steer Italy through the crisis.
With the next elections not due until 2013, a technocrat government could have about 18 months to pass painful economic reforms but will need to secure the backing of a majority in parliament and could fall before then.
Italy, the euro zone's third largest economy, came close to disaster this week after yields on 10 year bonds soared over 7.6 percent, the kind of level which forced Ireland, Portugal and Greece to seek an international bailout.
With a public debt of more than 120 percent of gross domestic product and more than a decade of anaemic economic growth behind it, Italy is at the heart of the euro zone debt crisis and would be too big for the bloc to bail out.
Financial markets have backed a Monti government and as prospects of Berlusconi going became firmer last week, yields dropped below the critical 7 percent level.
We don't yet have a new government in Italy and we have to wait, but I'm sure if Mario Monti will be appointed he will do whatever is necessary in order to restore the confidence of the financial markets in Italy, Alessandro Profumo, former head of Unicredit, Italy's largest bank, told Reuters.
SIGNS OF OPPOSITION MOUNT
Berlusconi, fighting an array of scandals and facing trials on charges ranging from tax fraud to paying for sex with an under-aged prostitute, had been under pressure to resign for weeks as the market crisis threatened to spin out of control.
International leaders including U.S. President Barack Obama, French President Nicolas Sarkozy and the head of the International Monetary Fund Christine Lagarde have expressed hopes a new government can be in place quickly.
Talks with Italian political parties are expected to begin on Sunday morning with hopes that a new government can be in place in time for the opening of financial markets on Monday morning.
However, even as preparations for a transition begin, signs of opposition have already appeared, with Berlusconi's PDL party split between factions ready to accept a Monti government and others deeply opposed.
Berlusconi had a working lunch with Monti before the vote, suggesting that the outgoing government will not try to block a quick handover, but the attitude of the centre-right as a whole remains unclear.
The PDL's main coalition ally, the regional pro-devolution Northern League, has declared it will go into opposition, underlining the risk that the new government will lack the broad parliamentary support it will need to pass deep reforms.
The convulsions in the centre-right at the prospect of a government led by Mario Monti signal a danger: that a divided coalition may be tempted to unload its divisions on the country, the daily Corriere della Sera said.
The centre-left Democratic party and smaller centrist parties have pledged support to Monti. Italy's main business and banking associations and some of the moderate trade unions have also called for a government of national unity.
However the support of the left will be tested if the new government tries to implement the kind of tough reforms to pensions and job protection measures that have drawn strong opposition from unions in the past.
In another warning of the kind of personal attacks he may soon face, the fiercely pro-Berlusconi Il Giornale daily declared Monti had joined the caste, the tag given to Italy's deeply unpopular political elite.
SuperMario joins the caste: 25,000 euros a month, it said in a front page article that referred to the salary Monti will receive following his appointment as senator for life by Napolitano this week..
(Writing by Philip Pullella and James Mackenzie, Additional reporting by Megan Davies in Moscow; Editing by Giles Elgood and Andrew Heavens)