His action comes as he faced mounting criticism over a sluggish economy and Italy’s involvement in Iraq.

Mr Berlusconi said he has the backing to form a new administration with the same allies, a move designed to avert snap elections and revive his flagging political fortunes.

President Carlo Azeglio Ciampi did not formally accept his resignation, instead asking Mr Berlusconi to remain in power “to dispatch current business” while inviting him to continue talks with his coalition allies.

“I accept the challenge of forming a new government,” Mr Berlusconi earlier told parliament, bowing to demands from two coalition partners who threatened to withdraw their support unless he resigned and formed a new government.

The rebels also demanded key policy changes, including more state aid for the poorer southern regions, after a heavy defeat in a regional ballot two weeks ago.

“A little over two weeks ago, in the regional elections, the country sent a signal of malaise which, in its magnitude, had a clear significance. I understood this signal and intend to give an adequate response,” the 68-year-old prime minister told the upper house.

“To relaunch our efforts, I plan to update our program, increase our strength to protect the purchasing power of families, to support our businesses and to ensure renewed and certain development in the south.

“To do this I intend to reinforce the government team,” he said, without giving details of the expected ministerial reshuffle.

A senior government politician told Reuters the industry, health and transport ministers were likely to lose their jobs in the reshuffle.

Under the terms of the Italian constitution, a prime minister is obliged to resign if he makes major changes to his cabinet.

It is a technique often used in Italy to strengthen faltering coalitions, but Mr Berlusconi has always resisted, sensing it would dent his image as a new-style politician.

The speech was immediately welcomed by Deputy Prime Minister Gianfranco Fini, the leader of Berlusconi’s biggest ally, the National Alliance.

He had threatened to withdraw from the four-year-old government if Mr Berlusconi failed to introduce sweeping changes he’d demanded.

If Mr Fini withdrew his party’s support, the government would fall, a full year before the end of its mandate.

Mr Berlusconi’s centre right administration has been Italy’s longest serving post-war government.

Assuming he can heal the wounds in his fractious coalition, he still faces a difficult struggle to win the next general election slated due next year.

The economy has barely grown since he took office in 2001, consumer and business confidence are low and opinion polls show a clear lead for the centre-left opposition led by former European Commission President Romano Prodi.