Rome (CNN) -- Italian President Giorgio Napolitano was holding talks Sunday aimed at forming a new government following the resignation of Italy's Prime Minister Silvio Berlusconi.
Ex-European commissioner Mario Monti was favorite to replace Berlusconi in a bid to stave off bankruptcy for eurozone's third-largest economy.
Last week Foreign Minister Franco Frattini said he supported an emergency government of national unity led by Monti.
"He has an international profile that no one can deny," Frattini said, according to his press office.
The departure of Berlusconi seemingly brings to an end to a long career played out on center-stage in the country's volatile political arena.
The thrice-elected 75-year-old business magnate has said he does not intend to stand again if new elections are called.
Berlusconi stepped down just hours after the lower house of parliament approved austerity measures aimed at restoring confidence in Italy's economy.
Crowds that had gathered outside the presidential palace erupted in cheers -- waving the Italian flag, dancing and singing the national anthem -- when news of his resignation broke.
Since entering politics nearly two decades ago, Berlusconi has been one of his country's great survivors, hanging on despite facing numerous trials, on charges ranging from corruption to having sex with an underage prostitute, none of which has resulted in a jail term.
He was first elected in 1994 but lasted barely seven months, thanks to a dispute with his right-wing coalition partners from the Northern League Party and an indictment for alleged tax fraud. He was acquitted on appeal in 2000 after the statute of limitations had expired.
His second term as prime minister came in 2001 and lasted until 2006, when his party lost an election to the center-left Union coalition.
The billionaire was elected a third time in 2008, under the banner of the newly created People of Freedom party.
In the three and a half years since, his colorful personal life has claimed ever more headlines, as his second wife filed for divorce, he was charged with having sex with an underage nightclub dancer and abuse of power, and the so-called "bunga-bunga" parties held at his home gained international notoriety.
Finally on Tuesday, he failed to win a parliamentary majority on a budget vote that should have been routine, and had to face the inevitable: his days at the helm were numbered. In the end, it was his perceived failure to tackle Italy's debt crisis rather than any private scandal which had brought him down.
Also on Saturday, the Italian lower house of parliament approved a series of austerity measures demanded by Europe to shore up confidence in the country's economy. It passed by a vote of 380 for to 26 against.
The package, which includes spending cuts and proposals to boost growth, was approved by the Senate Friday, resulting in a market surge.
The approved measures include pension reform, with plans to raise the retirement age from 65 to 67, the privatization of state-owned companies and sale of state-owned properties, the liberalization of certain professions, and investment in infrastructure.
As the fourth-largest economy in Europe, a meltdown in Italy would have a massive impact on global markets.
Berlusconi had pledged to step down once the austerity measures passed both houses of parliament after losing his majority.
Now that he has resigned, President Napolitano -- whose role is largely ceremonial -- could move to appoint a government of technocrats or call fresh elections for early 2012.
Besides Monti, other names being floated to lead a government include former Justice Minister Angelino Alfano and Gianni Letta, Berlusconi's chief of staff.
The structural reforms demanded by the European Central Bank and the European Commission must be brought in without delay, said Emma Marcegaglia, head of the Italian employers' association, Confindustria.
"These reforms are the only thing that can take us out of the current situation," she said. "We have no choice. We cannot wait for three months for the next elections, this would mean the destruction of Italy. "
She said a rapid solution to the political uncertainty in Italy was essential to put it "firmly back on the road to credibility."
She added: "We are not Greece, we are a strong economy, we are the world's eighth largest economy. We have many state assets and have lots of potential. But we have to survive this very difficult situation."
Italian borrowing costs continued to ease Friday, after spiking above 6.75% Wednesday, giving investors hope that Italy is finally starting to make some progress toward addressing its massive debt problems.
Yields on Italian 10-year bonds were trading at 6.5% Friday after dipping as low as 6.43%. While that's still stubbornly above 6%, it's finally moving in the right direction.
It is imperative to keep Italy's 10-year bond yields well below 7% because that was the level that eventually led to bailouts for Ireland, Portugal and Greece.
Currently, Italy -- the biggest bond issuer in Europe -- possesses a massive gross debt of roughly €1.9 trillion and a debt-to-GDP ratio of 120%. The country is widely considered to be too big to fail. But it may also be too big to bail.
CNN's Laura Smith-Spark contributed to this report