ROME - Italian Prime Minister Matteo Renzi prepared to hand in his resignation Monday after suffering a ruinous referendum defeat that has sparked fresh jitters about the fate of a united Europe.
"My experience of government finishes here," said a downcast Renzi after acknowledging a defeat of almost 60-40 percent over his constitutional reform bid, which cast a shadow over the short- and long-term future of the eurozone's third-largest economy.
Renzi, 41, was due to meet President Sergio Mattarella later Monday to hand in his resignation formally after a final cabinet meeting.
Mattarella will then be charged with brokering the appointment of a new government or, if he is unable to do that, ordering early elections.
The euro briefly sank to a 20-month low and most Asian stocks also retreated as investors fretted over the effect the political instability could have on a long-running banking crisis, and the possibility of an early election that could usher anti-EU parties into power.
Italy's FTSE MIB stock index tumbled 2.0 percent at the opening before clawing back some ground, underperforming other European markets. Italian bond yields also rose slightly, reflecting investor nervousness.
However, traders were reassured in part by the result of Europe's other crucial vote this weekend, which saw Austria reject a populist, far-right candidate for president. "The next steps are far from clear for Italy and traders are not panicking yet", said Craig Erlam, senior market analyst at Oanda.
Some analysts said the referendum could come to be seen as a landmark moment. Holger Schmieding, at the Berenberg private bank, said the risk that Italy could choose to leave the euro, while still remote, had increased.
Capital Economics said: "Italy has taken the first step along a path that could lead it out of the eurozone."
Populists in Italy and throughout Europe rejoiced at Renzi's downfall, with the founder of the anti-establishment Five Star movement Beppe Grillo calling for an election "within a week".
Grillo said a snap election should be held on the basis of a recently adopted electoral law designed to ensure the leading party has a parliamentary majority - a position the populist movement could find itself in at the next election.
"The people have won," Matteo Salvini, head of Italy's anti-immigrant Northern League party cheered on Twitter, with Marine Le Pen of France's far-right National Front sending him and the Italian people "congratulations on this victory". Britian's eurosceptic Nigel Farage, who spearheaded the "Brexit" campaign, said the vote looked "more about the euro than constitutional change". Few Italian observers share that analysis but poll data did show the No vote was strongest where unemployment was highest.
Most analysts see immediate elections as unlikely, partly because all the main political parties have already begun discussions on revising the new electoral law. The most probable scenario is a caretaker administration dominated by Renzi's Democratic Party taking over until an election due to take place by the spring of 2018.
The new administration's most pressing priority will be finalising the country's 2017 budget, which the European Commission has threatened to reject.
Finance Minister Pier Carlo Padoan is the favourite to succeed Renzi as prime minister and the outgoing leader may stay on as head of his party - which would leave him well-placed for a potential comeback to frontline politics at the next election, whenever it is.
Padoan cancelled a trip to Brussels Monday.
EU Economic Affairs Commissioner Pierre Moscovici said that while there was "political instability", Italy was nonetheless "extremely stable. It is a great economy, it is a very committed country in Europe".
But German Foreign Minister Frank-Walter Steinmeier said it was "not a positive message to Europe at a difficult time".
Opposition parties had denounced the proposed amendments to the 68-year-old constitution as dangerous for democracy because they would have removed important checks and balances on executive power.
Spearheaded by Five Star, the biggest rival to Renzi's Democratic party, the "No" campaign also capitalised on Renzi's declining popularity, a sluggish economy, and the problems caused by tens of thousands of migrants arriving in Italy from Africa.