Italian Prime Minister Enrico Letta resigned yesterday in a fast-paced political drama in Rome that paves the way for 39-year-old centre-left leader Matteo Renzi to take his place.
Financial markets cheered as Letta submitted his resignation to President Giorgio Napolitano after just 10 tumultuous months at the head of a fragile coalition with the centre-right in which he struggled with a rampant economic crisis.
Napolitano said he would start talks with parliamentary leaders to decide how the next government would be formed.
Letta, 47, is stepping down after his Democratic Party withdrew its support for the 10-month-old government.
It will now be up Napolitano, 88, to appoint a new prime minister or dissolve the legislature and call snap elections.
Democratic Party General Secretary Matteo Renzi, who commands the biggest contingent of lawmakers, said he wanted to avoid a popular vote. He said the legislature was capable of uniting behind a new premier.
Letta smiled as he arrived at the presidential palace and thanked his supporters in a tweet after losing in the showdown with Renzi.
"Thank you to everyone who helped," said Letta, a 47-year-old former Christian-Democrat who had defiantly ruled out resigning and presented his programme of reforms for this year as recently as Wednesday.
The "relay" between Letta and Renzi is unpopular among Italians who would have preferred early elections, according to opinion polls, and there is concern in the party that it could end up helping disgraced former prime minister Silvio Berlusconi.
Pippo Civati, a leftist opponent of Renzi within the party, said the he was resembling more and more "a character from a roman noir novel".
Analysts said Renzi would have to overcome the shock caused by him engineering Letta's overthrow despite an earlier gentleman's agreement that he would not do so.
But they also said he could quickly win support if he manages to push through important reforms, and investors were broadly supportive with stocks and bond rates holding stable on the financial markets.
"The reform process will probably get a boost," Italy's UniCredit bank said in a research note, adding however that "the road ahead is not without bumps".
Stocks yesterday jumped up 1.6 per cent as Letta resigned, also thanks to new data showing that the economy grew by 0.1 per cent in the fourth quarter.
The result was the first positive one for gross domestic product in two years after Italy's longest post-war recession ended in the third quarter.
Renzi, who is the mayor of the northern city of Florence, still faces delicate days ahead before he can finally clinch his goal of becoming the European Union's youngest prime minister and Italy's youngest-ever government leader.
The former Boy Scout was cheered in the streets of the historic city as he walked to work in the Palazzo Vecchio town hall and when someone wished him well he answered: "It's always needed, especially right now."
Deputy Prime Minister Angelino Alfano, leader of the New Centre-Right party, a junior partner in the coalition whose votes will prove critical, has said his support for Renzi is not a given.
Berlusconi could also score political points in the crisis, despite having been expelled from parliament last year over a criminal conviction for tax fraud.
His Forza Italia party, which is in opposition, has already said the billionaire tycoon will lead its delegation in the consultations with Napolitano.