The Italian prime minister, Mario Monti, has announced that he will resign as soon as he has passed a key budget law, well ahead of the official end of his mandate in April, possibly leading to elections as early as February.

Monti made the decision hours after former prime minister Silvio Berlusconi said he would seek office again. It follows a week in which members of Berlusconi's Freedom People party abstained from voting for key bills in parliament. Monti said on Saturday he had received a "categorical judgment of no confidence" from Berlusconi's party.

Berlusconi has said he will back the passing of the budget but will not guarantee further support for Monti's government of technocrats, who were drafted after Berlusconi resigned in November 2011 in the midst of scandals over his private life and a brewing economic crisis.

Monti, who has depended on the votes of the Freedom People in parliament and Berlusconi's grudging support, has long said he would not seek to govern if his backing dried up.

After weeks of indecision, Berlusconi kickstarted his comeback last week by accusing Monti of bringing Italy to "the edge of an abyss" with austerity policies that have reassured markets but have helped mire Italy in recession. On Saturday, Berlusconi – who is appealing against a tax fraud conviction and is on trial for paying an underage prostitute – said he was reluctantly taking the reins at his party again. "To win you need an acknowledged leader," he said. "It's not as though we didn't look for this leader. We did, and how, but there isn't one."

In a pointed reference to Berlusconi's previous government, Monti warned on Saturday that Italy needed to avoid becoming, once again, "the detonator that could blow up the eurozone".When the Freedom People party withdrew parliamentary support from Monti on Thursday, the difference between German and Italian benchmark bonds rose by 30 points.

Berlusconi will now launch an aggressive election campaign as he seeks to build his party's popularity back up from 15 per cent, which sees it far behind the centre-left Democratic party and in third place behind the Five Star movement led by comic Beppe Grillo.

The 76-year-old media mogul has recently been photographed in the company of players from AC Milan, the team he owns, and confirmed his comeback on Saturday at the team's training ground, echoing his use of football metaphors when he first entered politics in 1994. "I am in the game to win," he said on Saturday.

His main opponent at the coming elections is likely to be Pier Luigi Bersani, head of the Democratic party, who said Berlusconi's decision to undermine Monti was "irresponsible", and "betrayed a commitment made a year ago before the whole country".

Berlusconi and Bersani could yet be joined on the hustings by Monti himself, if he decides to seek election at the head of a centrist grouping of politicians who are backing him.