Italy's Senate on Friday began debating economic reforms demanded by the European Union at the start of a rapid process that will end the Berlusconi era and clear the way for an emergency government within days.

The upper house began debating the package at 0930 GMT and is likely to pass it later in the day. It will then go to the lower house which will vote on Saturday, triggering the resignation of Prime Minister Silvio Berlusconi.

Former European Commissioner Mario Monti, who is expected to replace the billionaire media magnate, was welcomed with applause when he took his place in the upper house after being appointed a Senator for life by President Giorgio Napolitano.

The appointment, transforming Monti from academic to legislator, is seen as a clear sign that he will be asked to head a largely technocratic government to push through urgent reforms and head off a perilous crisis. The new government is expected by Monday.

With Italy, the euro zone's third largest economy teetering close to losing control of its towering public debt, global financial markets have been panicked by the weeks of political uncertainty in Italy and the country's borrowing costs rocketed above sustainable levels on Wednesday.

Deeply alarmed by the crisis, Napolitano then banged heads to end the uncertainty and get a new government in place within days.

In a sign of the global concern at the crisis, U.S. President Barack Obama telephoned Napolitano on Thursday, expressing confidence that Italy could have an interim government in place quickly to reassure markets.

Berlusconi, who lost his majority in a vote on Tuesday, has promised to resign after the financial stability law is passed by both houses of parliament. The delay to his resignation, and talk of a long limbo before elections unnerved the markets.

Berlusconi is expected to resign after the Chamber of Deputies vote on the measures on Saturday and Napolitano could give a mandate to Monti as early as Saturday night or Sunday so that a government could be in place before markets open on Monday.

MARKETS CALMER, CENTRE-RIGHT UNDER STRAIN

The expected end to political chaos appeared to have brought some calm to markets with yields on 10 year bonds back under 7 percent, the level countries like Ireland and Greece hit before being forced to seek an international bailout.

Monti, a highly respected international figure, has been favoured by markets for weeks as the most suitable figure to lead a national unity government to urgently push through painful austerity measures.

A Monti government would be supported by most centrists and the biggest opposition force, the Democratic Party.

But Berlusconi's chief coalition partner, the Northern League, has said it would not back Monti and it is unclear how much support he will enjoy from Berlusconi's ruling PDL party.

With Berlusconi dropping his previous insistence on early elections, cracks have begun to widen between factions in the PDL, pointing towards a possible reshaping of the centre-right.

The party, an amalgamation of Berlusconi's original Forza Italia party and the National Alliance, an offshoot of the old far-right MSI party, is built entirely around the billionaire entrepreneur and may break up once he leaves the stage.

I see this risk. If there's no mediation, there's a risk of a breakup, Gianfranco Rotondi, a minister without portfolio who opposes a Monti-led government, told the daily La Stampa, adding that his opinion was widely shared in the PDL.

In one badly needed success that calmed markets somewhat, Italy managed to sell 5 billion euros ($6.8 billion) of one-year bonds on Thursday, but had to pay a whopping 6.087 percent interest rate, the highest in 14 years.

(Writing by James Mackenze, editing by Barry Moody)