The Italian parliament cleared the way for the resignation of Prime Minister Silvio Berlusconi with the approval of a budget law on Saturday, drawing a crowd of revellers to the streets of Rome celebrating his departure.

Once Berlusconi steps down, former European Commissioner Mario Monti is expected to be given the task of trying to form an administration to manage an escalating financial crisis.

Italy, the euro zone's third largest economy, came close to disaster this week when 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.

Berlusconi, who failed to secure a majority in a vote on Tuesday, promised to resign once parliament passed the package of economic reforms, demanded by European partners.

He is due to hand 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.

Political sources said he was expected at the presidential palace at 1930 GMT.

Crowds of demonstrators waving banners mocking Berlusconi gathered outside the president's residence at the Quirinale Palace as the billionaire media entrepreneur who has been Italy's longest serving prime minister prepared to depart.

Demonstrators chanting resign, resign, resign and clown, clowns, clowns also gathered outside the prime minister's office and parliament, heckling ministers as they walked between the two buildings.

Finally he is leaving. Finally it is over, Renato Cambursano, a deputy in the opposition Italy of Values said during the parliamentary debate that preceded the vote. This country has lost all its international prestige and the fault is all yours! he said.

Napolitano is expected to ask Monti to try to form an administration to tackle the financial crisis, threatening 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 of technocrat specialists to steer Italy through the crisis.

With the next election 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.

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, although they remain close.

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 with hopes that a new government can be in place in time for the opening of financial markets on Monday.

However, even as preparations for a transition begin, signs of opposition have 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 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.

(Additional reporting by Megan Davies in Moscow; Writing by Philip Pullella and James Mackenzie; Editing by Janet Lawrence)