Italian voters have dealt premier Matteo Renzi a resounding rebuke by rejecting his proposed constitutional reforms, plunging Europe's fourth-largest economy into political and economic uncertainty.
Mr Renzi announced he would quit following the referendum vote, in which 60% of voters rejected his proposals and signalled they wanted a change in political direction.
Mr Renzi, who had boldly staked his political future on winning the referendum, was expected to hand in his resignation to President Sergio Mattarella later.
The unexpectedly large margin of defeat, with a robust voter turnout of 68.5%, appeared to rule out any chance Mr Renzi would be offered another shot at forming a government, although analysts expect Mr Mattarella to ask Mr Renzi to stay on long enough to pass the new budget, with a target date of December 23.
The vote energised the anti-establishment 5-Star Movement and the anti-immigrant Northern League, whose leader has allied himself with far-right figures in Europe, including France's Marine Le Pen and Norbert Hofer in Austria, who lost a presidential run-off in the country on Sunday.
While the opposition parties were joined in antipathy for Mr Renzi's policies and reform course, they share little else in common, and have already begun vying to position themselves for new elections, although the timing of any vote remained unclear.
Analysts expect that Mr Mattarella would try to appoint a transition government to draft a new election law, with speculation centred on either Mr Renzi's finance minister, Pier Carlo Padoan, or the president of the Senate, Pietro Grasso.
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But that course is already facing opposition.
Northern League leader Matteo Salvini called for immediate elections this winter, "because real change happens only through electoral victory".
The current election law, which Mr Renzi wanted to reform, would hand a huge bonus of seats to the lower house while maintaining a proportional system for the upper house, raising the potential for parliamentary gridlock.
With much wrangling ahead, the risk facing Italy is "a prolonged muddle-through period, the emergence of an ineffective, patched-up coalition government in the post-election phase and continuously poor economic performance," said Wolfango Piccoli, a political analyst at Teneo Intelligence consultancy.
The Milan Stock Exchange opened down 2%, with many bank shares suspended due to excessive volatility, before returning to positive territory.
Investors had been anticipating Mr Renzi's defeat for several days, and had sold off Italian stocks and bonds. Monday's sanguine market reaction can also be attributed to the fact that Italy's markets indirectly enjoy a big backstop from the European Central Bank.
The central bank for the 19-country eurozone is buying 80 billion euro (£67.5 billion) every month in bonds, including government debt, across the currency bloc.
It is expected on Thursday to decide to extend that programme beyond its current end date of March.
The bond purchases aim to boost growth and inflation but also effectively help keep low government borrowing rates. That is crucial for Italy, which has a massive public debt load of 130% of GDP.
Italy's 10-year bond yield was down 0.03 percentage points at 2.01% on Monday. That is up from 1.65% last month but is still very low for a highly indebted country like Italy. It's also far short of the 7% rate that in 2012 had created fears that the country might default and fall out of the euro.
Still, the result casts doubts on the ability of Italy's third-largest lender and the worst performer in last summer's EU stress test, Monte Paschi di Siena, to execute a rescue plan that includes a five billion euro (£4.2 billion) market recapitalisation, amid reports of advisers meeting to discuss the vote's impact.
Italy's biggest bank, Unicredit, also is to present to analysts its new business plan next week in London.
Mr Renzi swept into power two-and-a-half years ago on a pledge to dismantle the system, but his brash ways divided his own party and his confidence was widely perceived as arrogance, even in other European capitals and especially in Brussels, where he had grown increasingly bold in pressing for flexibility on the budget.
"I lost and the post that gets eliminated is mine," Mr Renzi said early on Monday about an hour after the polls closed. "The government's experience is over."
Chancellor Angela Merkel's spokesman said the German leader "took note with regret" of Mr Renzi's announcement that he would resign following his defeat in the referendum.
Spokesman Steffen Seibert said in Berlin that Ms Merkel "worked very well and trustingly with Matteo Renzi, but of course the democratic decision taken by Italian citizens must be respected".
Mr Seibert noted that Ms Merkel has supported Mr Renzi's reform efforts in the past, and said that Germany will offer to work closely with the next Italian government.
Germany's finance minister, Wolfgang Schaeuble, called for a calm response to the outcome of the referendum and said that there's no basis to talk of it triggering a "euro crisis".
Mr Schaeuble said as he arrived for a meeting with his eurozone counterparts in Brussels that Italy needs a government that is capable of acting and he hopes it will continue pursuing reforms despite the referendum result.
He said: "I think we should take note of this with a degree of calm. The Italians have decided; we have to respect that. They will make the best of it."
The minister added: "There is no reason to talk of a euro crisis and there is certainly no reason to conjure one up."
Meanwhile, ratings agency Standard & Poor's said the rejection of Italy's proposed constitutional reforms in a referendum will not affect its credit rating for the country.
S&P, which rates Italy at BBB-, said the proposed reform would have had potentially positive benefits. But its rejection "does not have an immediate impact on Italy's creditworthiness".
It added that the vote outcome "does not have immediate implications for Italy's economic or budgetary policies beyond likely near-term changes in Italian politics".
AP
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