Prime Minister Silvio Berlusconi is expected to win a confidence vote on Thursday on an unpopular 25-billion euros austerity package, but faces a growing rebellion within his own party.
Seeking to stifle internal dissent, Berlusconi has said his government will resign if the package is not approved, as required by the constitution.
The vote in the Senate, due at around 0930 GMT, comes at one of the rockiest times in Berlusconi's two-year prmeiership.
His approval ratings have been falling, a widening corruption scandal has tainted his government, and an open rift with his nominal ally Gianfranco Fini is threatening the survival of the ruling coalition.
The resignation on Wednesday of a junior minister implicated in a judicial investigation was widely regarded as a sign of the increasing tension between Berlusconi and Fini, the lower house speaker and co-founder of the ruling People of Freedom party.
Economy ministry undersecretary Nicola Cosentino had been under mounting pressure to quit after being placed under investigation for suspected involvement in an illegal conspiracy to influence judges and smear rivals within his own party.
Cosentino, who denies any wrongdoing, said in a statement that he was being persecuted not just by the centre-left opposition but also by a power-hungry Fini.
Italian newspapers said on Thursday Berlusconi had "sacrificed" Cosentino to avoid an immediate showdown with Fini, who has been engaged in an acrimonious conflict with the premier for months and welcomed the reignation.
But a showdown between the two appeared only a matter of time.
"I'll destroy him. If he carries on like that I'll take him to the ballot box," Berlusconi was quoted by La Stampa daily as telling his aides in a tense meeting on Wednesday.
Cosentino's departure was the third resignation from Berlusconi's centre-right government in two months.
Industry Minister Claudio Scajola quit in May after being linked to an improper real estate deal and Federalism Minister Aldo Brancher stepped down last week -- just 17 days after his appointment -- in the middle of an embezzlement trial.
However, 73-year old Berlusconi still commands a large majority in parliament, and by using confidence votes to pass legislation can force internal dissenters into line.
The budget, including cuts in public sector pay and drastic reductions in regional funds, is opposed by groups ranging from unions to cash-strapped local governments, which say they will not be able to provide proper health and education services.
But the government says the measures are essential to bring Italy's budget deficit down from 5.3 percent of GDP to 2.7 percent by 2012, in line with EU requirements, and to reassure markets fearing a widening debt crisis in southern Europe.
Once approved by the Senate, the budget will go before the lower house of parliament, where the government is also planning to call a confidence vote by the end of the month.