Europe debt crisis brings down Italy's Berlusconi

(Reuters) - - Italian Prime Minister Silvio Berlusconi became the biggest political casualty of Europe's debt crisis on Tuesday when he announced he would step down after being stripped of his majority in parliament.

Berlusconi said he would leave office after parliament approves a budget law that includes reforms demanded by Europe, which is struggling to prevent the debt crisis from spreading to the third largest economy using the euro single currency.

Greece, ground zero of the crisis, is scrambling to win emergency funds to avert bankruptcy as soon as next month, and political parties argued over a new coalition government to replace that of Prime Minister George Papandreou, who has also announced this week that he will step down.

Berlusconi's imminent departure spells the end of the flamboyant billionaire media magnate's 17-year dominance of his country. His failure to implement reforms fueled a party revolt, and votes on the budget measures and his resignation could come as soon as this month

Berlusconi told his own Canale 5 television station that the only option now was an early election, which could prolong the uncertainty that has sapped market confidence.

President Giorgio Napolitano he would hold consultations on the formation of a new government. Napolitano is thought to favor a technocrat or national unity government for Italy, similar to the solution being put in place for Greece.

That would please markets that have driven the cost of borrowing for Italy's government to 14-year highs. Traders pushed the yield on benchmark 10 year Italian bonds to 6.79 percent, a level unseen since 1997.

Such levels effectively make it unaffordable for Italy to continue to finance its own debt, and are similar to levels that forced Ireland, Greece and Portugal to take bailouts. Italy, however, is widely regarded as being too big to bail out.

Berlusconi's government won a key budget vote on Tuesday after the opposition abstained. But it secured only 308 votes in the 630-seat lower house, eight short of a majority.

Pier Luigi Bersani, leader of the main opposition Democratic Party, said Italy ran a real risk of losing access to financial markets. For more, please click the title above.