Story highlights Italy's prime minister says he will resign after budget is passed

The prime minister lost his majority in parliament in a budget vote

Italian bond yields hit record highs

Italian Prime Minister Silvio Berlusconi said Tuesday that he would resign after Parliament approves a new budget that includes austerity measures sought by international lenders.

"After the approval of this finance law, which has amendments for everything which Europe has asked of us and which the Eurogroup has requested, I will resign, to allow the head of state to open consultations," he told Canale 5 television, which he owns.

He said that showing the international financial markets that Italy can reform its finances was of paramount importance.

"We have to prove the markets that we are working on it for real, and this is the first thing we have to take care of," Berlusconi said. "Everything else, including who leads the government, is secondary at the moment. Working for the good of Italy is the important thing."

Berlusconi's remarks came after the president's office said in a statement that he had agreed to step down.

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His announcement followed the passage by Berlusconi's government of a key budget vote in the lower house that fell eight votes short of a parliamentary majority.

It was not clear when the Senate will vote on the economic measures.

International concern has focused on Italy, the third-largest economy in the eurozone, in the past few weeks as analysts worry that the financial crisis centered on Greece might spread.

Although Italy is solvent, it holds a huge debt pile, and investors fear it may not be able to sustain that level of borrowing. As it is the world's eighth-largest economy, a meltdown would send shock waves through the global economy.

The European commissioner for economic affairs, Olli Rehn, described the economic and financial situation in Italy as "very worrying." He said a delegation would be sent from Brussels to Rome straight away, to meet Wednesday with ministers and senior civil servants.

Though the precise timing of Berlusconi's departure from power was unclear, news of his imminent departure signaled the end of an era in Italian politics.

The 75-year-old business tycoon has been a dominant force since forming his Forza Italia party in 1994.

He has weathered many crises, including sex scandals and corruption trials, in his three terms in office. But the loss of his parliamentary majority -- and with it his ability to command the government -- was a blow from which Berlusconi could not recover.

He had come under enormous pressure to resign in recent days, with what should have been a routine vote on the 2010 budget seen as a test of whether he still had the confidence of the government.

The budget passed with 308 votes, as all but one of those present in the lower house voted for the measure. The lone holdout abstained.

However, more than half of the country's 630 lawmakers did not take part in the vote, an indication that Berlusconi no longer has the backing of a majority in Parliament.

"We decided it was time now for Berlusconi to realize he has no majority any more in Parliament ad that he is part of the problem rather than being part of the solution," Federica Mogherini, an opposition Democratic Party member, said in explaining her decision not to participate in the vote.

"We are now at a turning point. It's not formal yet, but it's announced. So, it's politically done. Now we need to do it quickly and give Italy another, different season of stability and change."

Deborah Bergamini, a member of Berlusconi's People of Freedom Party, said she spoke with Berlusconi after the vote.

"My feeling is he felt really relieved," she said. "I believe that what he wanted to do was to assure ... the market."

Berlusconi has said he would prefer fresh elections to a technocratic government.

But Mogherini said that moving to elections now would be a mistake.

"Italy cannot afford elections now," she said. "I think we cannot really afford another time of instability of this. I think we need to do the reforms that are needed and to give stability to this country."

A better move, she said, would be a coalition government that would serve as a transition.

Opposition lawmakers chose to abstain as they did not want to prevent the budget being approved, since its passage was necessary for the government to function, but equally did not want to signal any support for Berlusconi.

Italy agreed last month during a European Union meeting in Brussels to implement structural reforms, intended to boost growth and cut spending.

President Giorgio Napolitano was expected to give details of what might come next, expected to be either the formation of a technocratic government or snap elections to be held in a couple of months.

Napolitano said the reforms must be put in place or risk Italy's credibility in the international community, raising questions over his confidence in Berlusconi's ability to see them through.

Berlusconi's main coalition partner added fuel to the fire Tuesday, saying he had asked Berlusconi to take a sideways step.

Umberto Bossi of the Northern League suggested that the prime minister should be replaced by former Justice Minister Angelino Alfano, although his office played down the remarks as "not the official line."

Without the support of the Northern League, Berlusconi was in a difficult position.

Although Italy passed a package of austerity measures in September, including tax increases, some economists fear that without further reforms, its debts could become overwhelming, and there would not be enough money in the European rescue fund to bail it out.

There have been growing fears that Berlusconi's government no longer had the strength to push through the austerity measures needed to get the economy back on track.

These include tax increases and raising the retirement age by two years, to 67.

The markets are watching events in Italy closely, as the ripple effects of a crisis there would be far more serious for the global economy than a collapse in Athens.

Although Italy's economy is in much better shape than that of Greece, rising borrowing costs for the Italian government are adding to the pressure.

"If Italy's problems were to rise to the level that Greece's are, we could be looking at a very, very serious problem in the financial markets, which certainly would be touching our shores here, and we could be revisiting the type of crisis that we all lived in 2008," said Antulio Bomfim, senior managing director and co-head of monetary policy insights at Macroeconomic Advisers in Washington.

He called Berlusconi's promise to resign "good news" but said it did not mitigate the uncertainty that has permeated world financial markets about the country's ability to repay its debts.

The eurozone could withstand a default by Greece, he said.

"But I don't know that it can withstand Italy defaulting," he said. "We're not there yet, but we're not moving in the right direction."

The nation, which has debts equal to about 120% of its economic output, has one of the largest bond markets in the world, worth an estimated 2 trillion euros (about U.S. $2.8 trillion).

Experts say the recent lofty interest levels are particularly concerning because the European Central Bank has been buying Italian bonds since the start of August. The move initially pushed yields below 5%, but that was short-lived.

Italian bond yields hit record highs Monday, getting perilously close to the 7% mark. The 7% level isn't an automatic trigger, but it is the level that prompted bailouts for Portugal and Ireland.

They spiked Tuesday to 6.77% after Berlusconi won the budget vote but lost his majority.

The New York Stock Exchange ended the day up 101 points (0.8%).

Berlusconi said Friday at the G-20 economic summit that Italy had agreed to let the International Monetary Fund "certify" its reform program, a step designed to boost investor confidence.