Italian Prime Minister Romano Prodi resigned on Thursday following 20 rocky months in office after the centre-left leader lost a vote of confidence in the Senate.
President Giorgio Napolitano asked Prodi to continue in office as the head of state holds consultations with political leaders, beginning Friday afternoon with the speakers of the Senate and the lower house Chamber of Deputies, the president's office said.
Prodi, 68, crippled by the defection early this week of the centrist Catholic UDEUR party, had decided to go ahead with the Senate showdown despite appeals from top leaders, including Napolitano, to resign instead.
The mild-mannered former economics professor appeared resigned to the near certainty that he would lose the vote but determined to carry through with it on principle.
"I am here because you cannot hide from the judgement of those who represent the people, and our people are watching us," he said beforehand.
Despite a last-minute change of heart by one of UDEUR's three senators and the support of five of Italy's unelected senators for life including Nobel medicine laureate 98-year-old Rita Levi-Montalcini, Prodi fell five votes short in the upper house.
Tension ahead of the vote spilled over into high drama when UDEUR member Nuccio Cusumano announced that he had changed his mind and would vote for Prodi.
UDEUR's Senate group leader Tommaso Barbato, beside himself with rage, hurled insults at Cusumano, who broke down in tears and was carried out of the chamber on a stretcher.
The president, following consultations with party and parliamentary leaders, can either call early elections or set up a transitional government.
Napolitano would prefer to task an interim team with carrying out badly needed electoral reforms, but the right-wing opposition has been clamouring for fresh elections since the latest crisis erupted with the resignation of Prodi's justice minister, UDEUR leader Clemente Mastella.
Prodi's conservative predecessor Silvio Berlusconi, eager for a return to power after 20 months in opposition, and his right-wing allies the National Alliance and the Northern League are riding high in voter surveys.
Berlusconi and National Alliance leader Gianfranco Fini immediately called for fresh elections on news of the resignation, while Rome Mayor Walter Veltroni urged electoral reforms, saying elections under the current system "would plunge the country into a dire situation."
Veltroni was elected to head the new Democratic Party, a merger of the centre-left's two largest formations, late last year.
The flamboyant Berlusconi clearly wants to strike while the iron is hot to take advantage of the left's steep drop in popularity as Prodi, unable to keep his squabbling coalition together, has failed to steer much legislation through a divided Senate.
Berlusconi, 71, who owns a vast media empire, has never come to terms with his loss by just some 24,000 votes to Prodi in the hard-fought elections of April 2006.
It was in anticipation of those elections that the Berlusconi government pushed through a new electoral law in December 2005 with the goal of limiting the extent of an expected win by the left -- causing the legislative gridlock that hastened Prodi's downfall.
Berlusconi "put the seeds of its own demise in the system itself," political scientist Franco Pavoncello told AFP.
Pavoncello, a professor at the American University of Rome, said he expected Napolitano to advocate electoral reforms for a country that has seen more than 60 governments come and go since World War II.
"Both left and right know that this system creates instability," he said, adding that he "wouldn't be surprised" if Napolitano asked Mario Monti, a former EU commissioner for competition, or Bank of Italy chief Mario Draghi to head an interim team of technocrats.
Prodi's government has faced a series of close votes in the upper house, falling briefly in February 2007.
On Monday, Mastella's UDEUR party, whose three votes have been crucial in the Senate, had complained of lack of support from the ruling coalition in his legal troubles.
Mastella resigned after being named in a corruption probe along with his wife. Both have protested their innocence.