(Reuters) - Italy's 89-year-old President Giorgio Napolitano said on Wednesday that he would step down soon because of his age, leaving Prime Minister Matteo Renzi facing a delicate political challenge to replace him.

After dropping hints for months, Napolitano began the president's annual end-year address by saying he was speaking also to his successor, who would "soon" take his place.

"I'm about to step down, to resign as the constitution expressly allows," he said. "I've reached an age that brings with it growing limitations and difficulties for me to do my institutional duties, which are complex and very demanding."

While he did not say exactly when he would go, he is widely expected to tender his resignation in January when Italycompletes its handover of the rotating European Union presidency.

If Renzi cannot steer an acceptable candidate through the complicated presidential election process, it will raise doubts about his ability to push through economic reforms and planned changes to the constitution and electoral system.

That would fuel speculation about early elections, adding to the political uncertainty surrounding the euro zone.

The Italian head of state holds wide but loosely defined powers, including appointing prime ministers, and can veto legislation as well as using the office's moral weight to influence the political agenda.

Napolitano, a former communist respected in Europe and Washington who first took office in 2006, reluctantly agreed to a second term last year after a deadlocked election threatened to leave Italy politically adrift, but said he would not serve the full seven years.

Months of speculation about potential successors have thrown up names ranging from European Central Bank President Mario Draghi to current Economy Minister Pier Carlo Padoan or Defense Minister Roberta Pinotti.

Renzi, 39, appointed by Napolitano less than a year ago as Italy's youngest-ever prime minister said on Monday he was "absolutely certain" a successor could be elected. But the process is full of hazards that could absorb valuable political energy as Italy struggles to pull out of recession.

Electing a president involves about 1,000 voters - members of parliament and representatives from the regions. It allows for multiple rounds of voting by secret ballot, offering ample opportunity for revenge to the many party enemies Renzi has made during his whirlwind months in charge.

Former Prime Minister Silvio Berlusconi has insisted that an agreement on the president will be needed for his support for wider constitutional reforms.

The experience of 2013, when former Prime Minister Romano Prodi was rejected by around 100 disgruntled lawmakers in his own party, also underlines the danger from within.

That fiasco toppled the then-leader of the Democratic Party Pierluigi Bersani, who had proposed Prodi, ultimately paving the way for Renzi to seize control of the party a few months later.