Italian Prime Minister Silvio Berlusconi is set to resign on Saturday after a new budget law is approved in parliament, making way for an emergency government and ending one of the most scandal-plagued eras in Italy's post-war history.

Once Berlusconi steps down, former European Commissioner Mario Monti is expected to be given the task of trying to form a new administration to manage a widening financial crisis that has put the future of Europe's single currency at risk.

The lower house of parliament began debating a package of economic reforms intended to reverse a collapse of market confidence ahead of a vote due after 1500 GMT.

The definitive approval of the package, which cleared the Senate on Friday and the lower house budget committee on Saturday, will mark the final act of the Berlusconi government.

Berlusconi is expected to hold a last cabinet meeting before going to the Quirinale Palace and handing his resignation to President Giorgio Napolitano.

His resignation will trigger a series of events over the weekend and most likely conclude on Sunday night or Monday morning with the formation of a new Monti government made up largely of non-political technocrats.

The new government will try to pass painful economic reforms to restore shattered market confidence after a period of turmoil that has sent the cost of managing Italy's huge public debt spiralling almost out of control.

Monti on Saturday morning met with the new head of the European Central Bank, Mario Draghi, and leaders of the centre-left opposition before holding a working lunch with Berlusconi.

Napolitano and Italian legislators have put the process on a fast track, prompting healthy reactions from the stock and bond markets which have been thrown into turmoil by weeks of political uncertainty in the euro zone's third-largest economy.

Italian bond yields, which shot way above sustainable levels earlier this week, fell sharply in response to acceleration of the process leading to Berlusconi's resignation and the approval of the reforms.

Italy's public debt is the second highest in the euro zone after Greece at 120 percent of gross domestic product and the escalating market crisis had pushed it dangerously close to needing a bailout that would have overwhelmed the bloc.


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.

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's working lunch with Monti suggested that the outgoing government would not try to block a quick handover but the head of the PDL's parliamentary group, Fabrizio Cicchitto, said the party was still not committed to giving its backing.

We need to see the political framework and know something about the programme and makeup of the government, he told reporters.

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.

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.

Alessandro Profumo, the former head of Italy's largest bank Unicredit, said he fully backed Monti.

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, he told Reuters in Moscow.

The ECB is doing what is necessary - it is not a matter of monetary policy only, but Italy has to do its own homework, Profumo said.

(Writing by Philip Pullella and James Mackenzie, Additional reporting by Megan Davies; Editing by Giles Elgood)