Prime minister Silvio Berlusconi resigned tonight, ending one of the most scandal-plagued eras in recent Italian history amid the jeers of thousands of protesters gathered in central Rome to celebrate his departure.
Mr Berlusconi, who failed to secure a majority in a crucial vote on Tuesday, handed in his resignation after parliament passed a package of measures demanded by European partners to restore market confidence in Italy's strained public finances.
President Giorgio Napolitano accepted Mr Berlusconi's resignation after a meeting in the presidential palace, his office said.
Former European commissioner Mario Monti is expected to be given the task of trying to form a new administration to face a widening financial crisis which has sent Italy's borrowing costs to unmanageable levels.
More than a thousand demonstrators waving banners mocking Mr Berlusconi flocked to the president's residence at the Quirinale Palace and shouted "clown, clown, clown" as the motorcade carrying the billionaire media entrepreneur who has been Italy's longest serving prime minister entered.
The crowd grew so unruly that Mr Berlusconi was forced to leave discreetly via a side entrance and return to his private residence.
Cheers broke out when they heard that Mr Berlusconi had resigned and the square broke out into a party atmosphere. They sang, danced and some broke open bottles of champagne.
An orchestra near the palace played the Hallelujah chorus from Handel's Messiah. "We are here to rejoice," one said.
Demonstrators chanting "resign, resign, resign" also gathered outside the prime minister's office and parliament, heckling ministers as they walked between the two buildings.
A small group of pro-Berlusconi demonstrators gathered outside his residence but were outnumbered by opponents.
This is something that deeply saddens me," the Italian news agency Ansa quoted Mr Berlusconi as telling aides.
The presidential palace said Mr Napolitano would begin consultations with political figures tomorrow morning. He is expected to formally ask Mr Monti to form a government.
Italy, the euro zone's third largest economy, came close to disaster this week when yields on 10-year bonds soared over 7.6 per cent, the kind of level which forced Ireland, Portugal and Greece to seek an international bailout.
Mr 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 to restore confidence in Italy's battered public finances.
Mr Monti, named by Mr 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 per cent 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 Mr Monti government and as prospects of Mr Berlusconi going became firmer last week, yields dropped below the critical 7 per cent 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, said.
Mr 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 US 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 tomorrow with hopes that a new government can be in place in time for the opening of financial markets on Monday.
Reuters