Italy looks set for lengthy political uncertainty after Prime Minister Silvio Berlusconi's pledge to resign, with his centre-right party calling for elections and the main opposition for a national unity government.
After failing to secure the majority in a vote in the lower house, Berlusconi said he would quit as soon as parliament passed budget reforms urged by European partners to help Italy stave off a debt crisis that is threatening the euro zone.
We no longer have the majority we believed we had so we need to recognise this and concern ourselves with what is happening on markets...we need to show markets we are serious, Berlusconi told Italian television by telephone.
Votes to pass the reforms in both houses of parliament are likely this month, and opposition leaders may try to bring this forward in order to end as soon as possible the flamboyant billionaire media tycoon's 17-year dominance of Italy.
Worries about the Berlusconi government's ability to implement reforms to boost Italy's sluggish growth and cut its huge debt have helped fuel a rise in Italy's borrowing costs to unsustainable levels, weighing on the euro and stock markets.
Global equity markets and the euro rose after Berlusconi's decision on hopes that a new leader will act more aggressively to tackle the crisis in the euro zone's third largest economy that is jeopardising Europe's single currency project.
The 75-year-old prime minister and his party say an election is the only realistic next step but opposition leaders have called for the formation of a national unity.
President Giorgio Napolitano said he would start consultations with all political parties after the new budget measures are approved.
When a government is defeated or resigns, it is the president's duty to appoint a new leader to try to build a majority in parliament, or to call new elections.
Pier Luigi Bersani, leader of the opposition Democratic Party, called for the beginning of a new phase and reiterated the proposal to form a transitional government including representatives from across the political spectrum.
But members of Berlusconi's centre-right People of Freedom (PDL) party, whose support would be needed for a broad-based government, said its formation would be difficult.
All the leaders of the PDL prefer early elections, because it's hard to imagine a government of national unity, Education Minister Mariastella Gelmini told Italian television, pointing to major disagreement among political parties.
Berlusconi and his closest allies have also said that the appointment of a government of technocrats -- an option favoured by markets and it is thought Napolitano -- would be an undemocratic coup that ignored the 2008 election result that brought the centre right to power.
EU Economic and Monetary Affairs Commissioner Olli Rehn said Tuesday that EU inspectors are due to arrive in Rome on Wednesday to begin a monitoring mission aimed at ensuring economic reforms are carried out as part of an agreement reached at a G20 summit last week.
Even when Berlusconi goes, there is no guarantee that reforms will be quickly implemented and relief on markets may not last long.
Yields on Italy's 10-year benchmark bonds rose to 6.74 percent Tuesday, near levels at which Portugal, Greece and Ireland were forced to seek a bailout.
(Editing by Louise Ireland)