Bank of Italy Governor Antonio Fazio (right) resigned yesterday, finally succumbing to months of intense pressure over allegations of ill practice in a bank takeover scandal that has tarnished Italy's international image.

Italian politicians and business leaders heaved a collective sigh of relief at the news, which came just as the government was preparing legislation aimed at forcing Mr Fazio from office.

The Bank of Italy said Mr Fazio's resignation would be formally presented to the bank's Superior Council today.

"The decision, made autonomously with a clear conscience, was taken to restore calm, in the greater interest of the country and the Bank of Italy," the bank said in a statement.

Mr Fazio's position became untenable after it emerged last week that he was being investigated by Milan prosecutors for suspected insider trading as part of a wider probe into allegations of rampant fraud at Banca Popolare Italiana.

Adding to the pressure, the European Central Bank raised questions over allegations the 69-year-old Fazio received lavish gifts from Pop Italiana's former CEO, Gianpiero Fiorani, who was arrested last week on suspicion of embezzlement.

The flurry of events persuaded many supporters, including the influential Roman Catholic Church, to abandon him and encourage his old enemy, Economy Minister Giulio Tremonti, to draw up a bill to force him from his position.

Italian Prime Minister Silvio Berlusconi welcomed Mr Fazio's resignation, saying it was an act "of great responsibility". He added that he did not know who might take his place.

Under existing rules, it is up to the Bank of Italy's superior council to pick the successor, with the government and president then asked to ratify the nomination.

However, in its endeavours to force Mr Fazio out, Mr Tremonti has indicated he was planning to pass a law by which the government would pick the governor and then seek parliamentary approval.

The proposals, included in a much broader reform package covering Italy's entire financial regulatory framework, are due to be discussed by the cabinet today.

Opposition leader Romano Prodi said he wanted to work with the government on Mr Fazio's replacement, adding that the next governor should be "someone with a high international profile."

Among the possible candidates are former Treasury Director-General Mario Draghi, former European Commissioner Mario Monti, former ECB board member Tommaso Padoa-Schioppa and current Treasury Director General Vittorio Grilli.

"Whoever the successor is, he will inherit a complex situation and serious credibility problem," said Luigi Speranza, an economist with BNP Paribas in London.

However, the successor will definitely not inherit the open-ended mandate enjoyed by Mr Fazio. Instead, under the terms of the regulatory reform drawn up by the government, he will almost certainly be offered a renewable five-year term.

Mr Fazio had headed the Bank of Italy since 1993 and used to enjoy a spotless reputation as a wise manager of monetary policy as Italy battled to secure membership of the euro currency.

But his good name took a beating this year after allegations emerged in July that he had unfairly favoured Pop Italiana in a bid battle against Dutch rival ABN AMRO for control of Banca Antonveneta.

Wiretaps leaked to the press revealed that both Mr Fazio and his wife Maria Cristina advised Pop Italiana's former CEO over the takeover which ultimately failed.

Mr Fazio denied any wrong-doing in the case and resisted widespread calls to quit, saying that his stewardship of the banking sector was conducted in Italy's best interests.

Critics said his policy was merely aimed at preventing foreign competitors from gaining a foothold in the lucrative domestic banking sector. Italian banking stocks gained ground on news of Mr Fazio's resignation. (Reuters)

"The market is betting that now, without Fazio, there could be more room for mergers and stake-building," said Manlio Bonafede, fund manager at Banca Leonardo SGR in Milan.

Among possible measures to be included in the government's planned regulatory reform is a move to strip the Bank of Italy of its role as regulator of the domestic banking sector.

Mr Tremonti repeatedly accused Mr Fazio of failing in his duties to protect Italy's small investors and said he should have spotted the massive fraud at dairy group Parmalat well before it came to light in 2003.

The recent banking scandal has embarrassed the ECB, but it stopped short of criticising Mr Fazio himself, instead condemning Italy's opaque legal framework for bank mergers.

However, the mood hardened last week when it emerged that Mr Fazio had accepted lavish gifts from Mr Fiorani in recent years.

Yesterday, ECB President Jean-Claude Trichet said he fully respected Mr Fazio's decision to resign.

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