Italy starts talks on post-Renzi government

One possible candidate is 66-year-old finance minister Pier Carlo Padoan, who helped Renzi's efforts ro revive the economy and stabilise the banking system. He has previously worked with the World Bank and the European Central Bank.

Another candidate is 71-year-old Pietro Grasso, president of the Senate, an anti-mafia prosecutor, who has close ties to Mattarella as he investigated the Sicilian mafia’s murder of Mattarella’s brother in the 1980s.

Renzi gone

Renzi resigned after the Senate passed the budget bill, ironically giving his government a vote of confidence.

But the 41-year-old tied his premiership to the approval of his reforms in Sunday's referendum. In the event, 59 percent of voters rejected the proposals.

"Budget law approved. Formal resignation at 1900. Thanks to everyone and viva l'Italia!" Renzi tweeted.

Opposition parties, especially the populist Five Star Movement that campaigned hard for a No during the referendum campaign, are calling for early elections. Far-right Northern League has threatened to take people to the streets if elections are not called.

Speaking to his Democratic Party's (PD) leadership, Renzi said PD was "not afraid of anything or anybody, if other parties want to go to the polls".

General elections are due in 2018.

Renzi might try to retain his leadership of the party, so he could emerge as a candidate when elections are held.

On Wednesday, Moody's ratings agency downgraded Italy's outlook for sovereign debt to negative from stable, saying the failure of the constitutional referendum slowed reform progress and left Italy more exposed to unforeseen shocks.

The political turmoil casts a shadow on the fragile banking system too, with Italy’s third largest lender, Monte dei Paschi bank, needing to raise €5 billion. Investors are not eager and the new government might have to save the bank.