Italian Prime Minister Silvio Berlusconi has agreed to resign once budgetary reforms are passed.
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.
According to Italian television, Mr Berlusconi made the decision followed a meeting with the Italian President.
The meeting came after Mr Berlusconi lost his majority in the lower house of parliament.
Mr Berlusconi won a vote to ratify the country's budget, but only because opposition MPs abstained.
Some of his own MPs defected, meaning he was eight votes short of a majority in the lower house.
The same budget measure was defeated in Parliament last month by a single vote.
Allies, including Mr Belusconi's coalition partner the Northern League, had increased pressure on him to resign.
Mr Berlusconi says he will step down after Parliament accepts a raft of economic reforms he has proposed.
The reforms are expected to go before Parliament in two weeks' time.
Mr Berlusconi says in his view, fresh elections are the only way forward.
Interest rates have shot up in recent days, causing concern about whether Italy can service its debts, the BBC reports.
In market trading on Tuesday the cost of borrowing for the Italian Government rose again to 6.74%, which is close to the level where a debt bailout would be needed.