This article is more than 9 years old

This article is more than 9 years old

Portuguese prime minister José Sócrates has said he has submitted his resignation to the president after parliament rejected his minority Socialist government's latest austerity measures.

The loss of the vote "has taken away from the government all conditions to govern", Sócrates said. It brings the country closer to needing a bailout.

Sócrates is said he tendered his resignation to President Aníbal Cavaco Silva tonight, leaving the country in a political limbo that would place further pressure on Portugal's record-level bond yields.

Sócrates had said before the vote that he would resign if the measures to cut spending and increase taxes – designed to see off a bailout similar to those taken by Greece and Ireland – were rejected.

The measures had aroused the fury of trade unions, and railway engineers walked off the job in the morning, causing widespread travel disruption.

Political turmoil in Lisbon set nerves jangling in the eurozone just as it was revealed that EU leaders would postpone making a decision on a new €440bn bailout fund. A draft version of the deal to be agreed after two days of talks on Thursday and Friday delays a final decision until June, according to reports.

An election in Portugal will take at least 55 days to organise. That raised additional fears that Sócrates – who would head a caretaker administration with limited powers until then – will be unable to head off a full collapse in market confidence.

"My worry is the period of inaction before a new government takes over," said Silvio Peruzzo, an economist at RBS in London.

The main opposition centre-right Social Democratic party, led by Pedro Passos Coelho, has been ahead in recent opinion polls. The Social Democrats also favour debt control.

Portugal's benchmark 10-year bond yield had risen to 7.77% before the debate on Wednesday, while five-year bonds hit a euro lifetime high of 8.2%.

Economists see borrowing costs above 7% as unsustainable and say Portugal will have to resort to the rescue mechanism.

Analysts suggested the failure to agree on measures would push Portugal closer to a bailout.

"It seems more and more likely that Portugal will need some kind of support," Charles Diebel, head of market strategy at Lloyds bank, said before the debate.

News of the delay in putting together the €440bn eurozone rescue fund, coupled with concern about Portugal, could lead to another spell of instability on bond markets.

"I fear that Monday could be Black Monday for markets," one EU financial source told Reuters, emphasising that EU policymakers still had a long way to go to draft all the necessary documents.

Portugal's national debt stands at 83% of GDP. The budget deficit hit 9.3% of GDP in 2009, but was lowered to 7.3% in 2010 and Sócrates had wanted it to remain at 4.6% by the end of this year.

Even before Wednesday's events, Portugal's economy had been expected to shrink by 1.3% this year.