Italian prime minister Silvio Berlusconi has agreed to resign after the parliament approves the country's austerity plans, the Italian president Giorgio Napolitano said this evening.

A vote on the austerity measures is planned for next week.

Mr Berlusconi left Mr Napolitano's office tonight after an hour of consultations. The talks were held after Mr Berlusconi lost his majority in parliament today.

He said his decision to resign was "for the good of the country, and to settle financial markets that have lost confidence in Italy's ability to cut debt and encourage growth."

Mr Berlusconi said he would prefer to call early elections, but that the decision rests with Mr Napolitano.

Mr Napolitano said he would now hold consultations on the formation of a new government. Markets and Mr Napolitano himself are thought to favour a technocrat or national unity government.

In comments that marked a dramatic shift from his normally defiant tone, Mr Berlusconi conceded he had lost his parliamentary majority during a routine vote and that "things like who leads or who doesn't lead the government" is less important than doing "what is right for the country".

The 75-year-old leader won a closely watched vote on a technicality, but the tally revealed he no longer commands enough support to govern much longer.

He met president Giorgio Napolitano, who can dissolve parliament and call early elections.

Mr Berlusconi’s government is under intense pressure to enact quick reforms to shore up Italy’s defences against Europe’s debt crisis. However, a weak coalition and doubts over Mr Berlusconi’s leadership have ignited market fears of a looming Italian financial disaster that could bring down the 17-nation euro zone and shock the global economy.

The vote, on a routine measure to approve the 2010 state accounts, garnered 308 votes of approval and none against in the Chamber of Deputies. But 321 deputies abstained from voting - most the opposition centre-left - a tactic that laid bare Mr Berlusconi’s shrinking hold on parliament.

He was eight shy of the 316 votes he needs to claim an overall majority in the 630-member chamber. Next week, the government has planned a confidence vote on economic reforms that were demanded by the European Union. Without an outright majority in that vote, Mr Berlusconi would be forced to resign.

Mr Berlusconi scrutinised the count after the vote, trying to work out who had abstained, and later huddled at his office with his top adviser.

“This government does not have the majority!” thundered opposition leader Pierluigi Bersani. “If you have a crumb of sense in front of Italy, give your resignation.”

As he spoke, Mr Berlusconi scribbled his options on a piece of paper. A photo showed he wrote “resignation” and also “eight traitors,” an apparent reference to former allies who had abstained.

Prior to the vote, even Mr Berlusconi’s top ally Umberto Bossi of the Northern League urged the premier to leave.

“We asked him to step aside,” said Mr Bossi, the volatile ally who brought down Mr Berlusconi’s first conservative government in 1994.

He said the man Mr Berlusconi has already picked as his successor, former Justice Minister Angelino Alfano, should now lead the government.

Italy is the euro zone’s third-largest economy, with debts of around €1.6 trillion. It is considered too big for Europe to bail out like Greece, Portugal and Ireland.

Even worse, a substantial part of Italy’s debt needs to be rolled over in the next few years

Italy’s borrowing rates hit their highest level since the euro was established in 1999. The yield on Italy’s ten-year bonds was at 6.77 per cent.

A rate of over 7 per cent is considered unsustainable and proved to be the trigger point that forced Greece, Portugal and Ireland into accepting financial bailouts.

Business leaders once enthusiastically backed the media mogul’s leadership, but now some say his government has failed to revive Italy’s stalled economy.

The opposition centre-left has long demanded that Mr Berlusconi resign, citing sex scandals, criminal prosecutions and legislative priorities it says are aimed at protecting the premier’s own business interests rather than those of the country. However, it has failed to come up with a leader who can unite the opposition.

AP