The Italian senate today passed a key package of economic austerity measures demanded by the EU.
The move paves the way for prime minister Silvio Berlusconi to quit as early as this weekend after the lower chamber clears it.
The Chamber of Deputies could take up the legislation as early as tomorrow.
The Senate voted 156-12 to pass the budget bill, which contained the reform measures.
Mr Berlusconi has promised to resign as soon as parliament passes the reforms.
There are mounting indications that respected economist Mario Monti will be asked to head a transitional government to push through even more difficult reforms to pull Italy back from a Greek-style economic crisis that would threaten the existence of the entire euro zone and cause a global recession.
Paving the way for Mr Monti's appointment, president Giorgio Napolitano made him a life senator on Wednesday in a surprise move that raised his already high profile and instantly made him a legislator.
European shares drifted higher early this morning on expectations that some political developments in Italy and Greece could pave the way for tough austerity measures that are crucial to contain the region's two-year-old debt crisis.
Earlier, the FTSEurofirst 300 index of top European shares was up 0.5 per cent at 968.08 points after falling in the previous two sessions. Banks featured among the top gainers, with the sector index up 1.1 per cent.
Mr Berlusconi, who lost his majority in a vote on Tuesday, has promised to resign after the financial stability law is passed by both houses of parliament.
The law is due to be approved by the lower house Chamber of Deputies tomorrow. That would mean Mr Napolitano may accept Mr Berlusconi's resignation as early as Saturday night and formally mandate Mr Monti to try to form a new government soon afterwards.
Mr Napolitano has urged parliament to act fast and some commentators say a new government made up mostly of technocrats could be in place as early as Sunday night before markets open Monday.
The president moved quickly to calm markets on Wednesday after Italy's borrowing costs reached levels that could close its access to market funding, a development which would threaten the future of the euro zone.
He gave assurances that Mr Berlusconi would honour his pledge to step down after parliament approved reforms geared to placate markets and he would waste no time in either appointing a new government or calling new elections.
At first, Mr Berlusconi had insisted that early elections were the only option. But he has since softened his stand and is said by sources to be open to a new government.
Mr Monti, a highly respected international figure, has been pushed by markets for weeks as the most suitable figure to lead a national unity government to urgently push through painful austerity measures.
Mr Napolitano met Mr Monti last night, and, in a sign of the urgency of the situation, spoke by telephone with US president Barack Obama.
In one badly needed success that calmed markets somewhat, Italy managed to sell €5 billion of one-year bonds yesterday - but had to pay a whopping 6.087 per cent interest rate, the highest in 14 years.
Agencies