Italy's Berlusconi to resign as prime minister, president says

The Italian parliament passed budgetary reforms, but a majority of members did not vote.

ATLANTA (CNN Wire) -- Italian Prime Minister Silvio Berlusconi has said he will resign after the next budget is approved by parliament, a statement from the president's office said Tuesday.

The news came hours after Berlusconi's government passed a key budget vote, but fell eight votes short of a majority in parliament.

The announcement followed a visit by Berlusconi to the office of President Giorgio Napolitano.

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, a clear indication that Berlusconi no longer commands the backing of a majority in parliament.

Opposition lawmakers chose to abstain as they did not want to prevent the budget being approved, since it is necessary for the government to function, but equally did not want to lend Berlusconi any support.

Berlusconi had been expected to visit the president Tuesday regardless of the result of the budget vote.

The 75-year-old prime minister has come under increasing pressure to resign in recent days.

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.

Europe: So many ways to go wrong

Italy agreed to implement structural reforms during an European Union meeting in Brussels last month. Napolitano said the reforms must be put in place or risk Italy's credibility in the international community, raising questions over his confidence in the prime minister'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."

If the Northern League were to withdraw its support from Berlusconi, it would be very difficult for him to recover.

Berlusconi has survived many challenges to his leadership in the past.

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 meltdown 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.

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.

Italian bond yields near danger zone

Italian 10-year bond yields remained well above 6% Tuesday, reaching a high of 6.74% before easing to 6.62%.

Many protesters over the weekend called for Berlusconi to step down and said they want immediate elections. Others pushed for a technocratic transitional government to guide Italy through the difficult months to come.

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.

--CNN's Matthew Chance, Becky Anderson and Hada Messia contributed to this report.