Rome - Italian Prime Minister Silvio Berlusconi, bowing to a parliamentary revolt and intense market pressure, said he would resign once crucial reforms aimed at calming eurozone turmoil are adopted this month.
Markets in Asia rallied and Italian borrowing costs fell on hopes that the eurozone debt crisis already ravaging Greece might yet bypass Italy if the bloc's third-largest economy gets serious about reform under new leadership.
"After the adoption of the stability law, which will contain all the requests made by the eurozone, I will resign," Berlusconi told the Canale 5 network, part of the colourful tycoon's media empire.
Berlusconi said that after his resignation he expected President Giorgio Napolitano to dissolve parliament and call early elections. But other options include a unity government headed by a non-partisan technocrat.
Berlusconi, who has survived numerous scandals during his two decades atop Italy's volatile political scene, appeared shocked at the result in parliament of a procedural vote on budgetary legislation.
The premier's majority was wiped out by several defections from the ranks of his ruling People of Freedom party, leaving him fatally exposed if the opposition went ahead with a threatened vote of confidence.
The combination of Italy's low growth rate and €1.9 trillion debt mountain has triggered investor alarm that the country could be the next victim of Europe's debt crisis.
Berlusconi's popularity rating has slumped to a record low of 22% amid the current crisis and he is currently a defendant in three trials for bribery, tax fraud, abuse of power and paying for sex with a 17-year-old girl.
A first group of European officials was set to begin meetings in Rome on Wednesday to ensure that reforms are being implemented and prevent a wider selloff from investors growing more nervous about the euro's future.
The officials form part of a humiliating special surveillance mechanism from the European Union and the International Monetary Fund that Berlusconi agreed to at the G20 summit in France this month to reassure investors.
Berlusconi had promised his fellow eurozone leaders to overhaul Italy's pensions system and accelerate sales of state assets, but the reforms had stalled to the intense frustration of Germany and others.
A senate committee was set to meet later on Wednesday to discuss proposed reforms to boost Italy's virtually stagnant growth rate, including measures to boost competition in the labour market and encourage hiring.
The talks in parliament should also help lay out a timetable for expected final approval of the measures and therefore Berlusconi's exit, with the centre-left opposition now calling for rapid adoption of the budget law.
Under the current timetable, the measures should be approved by the upper house next week and by the lower house before the end of the month.
Following a meeting of EU finance ministers in Brussels, Economic Affairs Commissioner Olli Rehn called the situation in Italy "very worrisome" and said reforms should come "the sooner the better, because time is of the essence".
Berlusconi had long dismissed warnings from the EU and his critics at home about Rome's ailing finances, but with his third term as premier winding up, he admitted it was time to "show the markets that we are serious".
In early Asian trading on Wednesday, the euro steadied against the dollar and major stock markets in Tokyo and Hong Kong rallied.
The yield on Italian 10-year bonds fell to 6.65% - down from a record high of 6.77% reached before Berlusconi's announcement, but still at a level that makes the government's long-term borrowing costs unsustainable.
"The market likes the fact that Berlusconi is going to resign once the austerity package is approved," said Peter Cardillo, chief market economist at Rockwell Global Capital, a securities firm based in New York.
"That should help relieve some of the market fears but forming a new government might take some time," he said. "This is a relief for now but the reality is that there might be a real hangover and a price to pay."