Silvio Berlusconi made a stunning U-turn yesterday and threw his support behind the government of Premier Enrico Letta in a confidence vote.
He acknowledged defeat on the Senate floor after defections in his People of Freedom party robbed him of the backing he needed to bring down the government.
The three-time premier delivered an unexpected address after Letta made an impassioned plea to keep his five-month-old coalition alive.
"Italy needs a government that can produce structural and institutional reforms … The country needs to modernise," Berlusconi said.
"We have decided, not without internal strife, to vote in confidence."
The Senate then voted to back Letta 235-70 with 14 abstentions and one absence.
It was a major setback for Berlusconi, who had demanded that his five Cabinet ministers quit the government and bring it down. He was furious over a vote expected tomorrow that could strip him of his Senate seat after his tax fraud conviction and four-year prison sentence.
But in a remarkable challenge to his authority, several allies said they would be switching support to Letta's hybrid coalition.
The Milan stock exchange gained nearly 2 per cent on the announcement of the vote result, which seemed to have caught the entire chamber by surprise.
Minutes earlier, a People of Freedom party leader had said Berlusconi's forces would vote against Letta.
In a speech to the Senate, Letta hailed his government's successes and outlined his agenda to revive Italy's economy and ease record unemployment.
He warned lawmakers Italy "runs a risk, a fatal risk" depending on the choices they made.
"Give us your confidence to realise these objectives. Give us your confidence for all that has been accomplished - a confidence vote that isn't against anyone, but is a confidence vote for Italy and Italians."
Berlusconi's party has been badly divided ever since Italy's high court upheld his tax fraud conviction and sentence in August. But it was thrown into chaos after several lawmakers and his closest ally and political heir, Angelino Alfano, insisted they would be supporting Letta.
Meanwhile, a money laundering trial that involves 11 defendants - including Berlusconi's son Pier Silvio and two Hong Kong women, Paddy Chan Mei-yiu and Katherine Hsu May-chun - resumes in Milan today.
The defendants are accused of using a complex scheme of shell companies to funnel money and avoid tax on profits from the sale of television shows.
Berlusconi is not indicted in the trial, but allegations that he tried to interfere with the transfer of evidence from Hong Kong to Italy may bring him into the case.
Additional reporting by Lana Lam