Italian lawmakers gave initial approval to a reform package aimed at staving off bankruptcy on Friday, easing market tensions on the eve of Prime Minister Silvio Berlusconi's expected resignation.
The measures -- promised by Berlusconi at a European Unionsummit last month -- include state asset sell-offs, incentives to hire workers and moves to increase competition in professions like laywers and accountants.
Final approval of the measures by the lower house -- expected on Saturday -- is the precondition set by Berlusconi for his resignation after a parliamentary revolt this week deprived his centre-right coalition of a ruling majority.
Italian stocks rallied after the vote, rising more than 3.0 percent, while borrowing costs eased with the difference between the rates on Italian 10-year government bonds and benchmark German ones narrowing to 4.76 percentage points.
The yield on 10-year bonds fell to 6.602 percent, still too high for comfort but an improvement on the 7.0-percent threshold it breached this week in a wave of market turmoil over fears Italy could suffer a blow-up on its debt.
Meanwhile European Union President Herman Van Rompuy flew to Italy for a scheduled visit and was due have a working dinner at 1930 GMT in what could be one of Berlusconi's last diplomatic meetings before his resignation.
Speaking at en event at the European University Institute near Florence, Van Rompuy said Italy should go for reforms instead of elections but said the package of reforms agreed on Friday was a "fundamental step" for the economy.
French President Nicolas Sarkozy said Italy and Greece, which swore in a new national unity government on Friday after days of fraught negotiations that have kept Europe on edge, should be put "back on the rails".
Former EU commissioner Mario Monti is seen as the most likely nominee to be chosen to form a new government by President Giorgio Napolitano once the economic reforms are definitively adopted and Berlusconi resigns.
Monti, a 68-year-old economist who has already received wide support from top Italian political and business leaders, would head up a transition government charged with implementing complex reforms and painful austerity.
The nomination is not yet a done deal however because parts of Berlusconi's coalition and a small opposition party, Italy of Values, are pressing for parliament to be dissolved and for Napolitano to call early elections.
The prospect of an election campaign in Italy -- the eurozone's third largest economy -- in the middle of a profound debt crisis has spooked the markets and increased international concern of prolonged political upheaval.
Under the current timetable, elections are only due to be held in 2013.
When announcing his impending resignation, Berlusconi said that he wanted early elections and would support 41-year-old Angelino Alfano, his former justice minister and leader of his People of Freedom party for premier.
Berlusconi is now tending towards Monti, Italian newspapers reported.
On Thursday he congratulated Monti on his appointment as senator and said he was sure the economist would work "in the interests of the country."
The combination of Italy's 1.9-trillion euro ($2.6-billion) debt, its extremely low growth rate and currently high borrowing costs have fanned fears that it could be cut off from commercial debt markets within months.
The International Monetary Fund and the European Financial Stability Facility (EFSF) have both reportedly offered financial help but economists warn that the size of Italy's economy may make the country "too big to bail".
"If a country comes and says it needs help immediately, we're ready," EFSF chief Klaus Regling was quoted in German daily Sueddeutsche Zeitung as saying.
Nevertheless, time was "running out" for Italy, the EFSF chief said. "The country needs a functioning government as soon as possible."