Italy's finances deteriorated further today despite premier Silvio Berlusconi confirming he will step down and not run again for office.

Italy's borrowing costs jumped. The yield on 10-year bonds rose above 7%. The main Milan stock index was trading 3.6% lower and shares in Mr Mr Berlusconi's Mediaset empire were battered, down 9.8%.

The problems came a day after Mr Berlusconi promised to resign after Parliament passes new austerity and reform measures. While Mr Berlusconi's majority was hampered in pushing through reforms, the makeup of Italy's next government remains a looming question.

Mr Berlusconi said he would quit after a routine vote in parliament revealed he no longer had the majority he needs to push through policy. He said he would step aside once Parliament passes economic reforms demanded by the European Union to prevent Italy from being swept up further into Europe's debt crisis.

No date has been set, but earlier indications suggested it would happen next week.

Once Mr Berlusconi resigns, President Giorgio Napolitano must begin consultations to form a new government - possibly with the conservative leader from Mr Berlusconi's party, or if consensus cannot be reached, a technical government may be sought.

Mr Berlusconi is pressing for new elections in early 2012.

"I won't run, actually I feel liberated," he said.

Mr Berlusconi tapped Angelino Alfano, his former justice minister, to head his People of Liberties Party a few months ago. At 41, Alfano represents a new generation of politicians after 17 years of Berlusconi leadership.

Mario Monti, a former EU competition commissioner who now heads Milan's prestigious Bocconi University, has been widely tipped as a candidate to head a technical government.

Mr Berlusconi conceded it was up to Mr Napolitano to decide how to proceed once he steps down.

It is not clear that Mr Napolitano would want to subject Italy to elections any time soon given the need to calm markets.

He may try to sound out politicians about the possibility of forming either a government of technocrats or a broad-based government that could hold a majority in parliament.

The 7% threshold is psychologically important for traders because Greece, Ireland and Portugal asked for bailouts when it became clear the rate was not coming back down from that level.