Italian Prime Minister Silvio Berlusconi has won a vote on the country's budget but has lost his majority in the lower house of parliament, it has been reported.
Tuesday's vote came as pressure mounted on the embattled leader to resign, with his key coalition partner Umberto Bossi urging the 75-year-old to stand down.
308 deputies voted for the motion, eight short of a required absolute majority of 316, after Italy's opposition parties abstained from and a number of MPs from Berlusconi's coalition defected.
Despite the budget passing, Berlusconi's loss of majority could prove crucial at a confidence vote expected to take place later this week.
The Italian prime minister is under growing pressure to resign as the international markets lose confidence in the country's ability to reform.
Yields on Italian 10-year bonds hit euro-era record highs of 6.767% on Monday. Rumours that the prime minister was preparing to stand down saw markets bounce, a clear indication that investors see the scandal-hit 75-year old as a main block to reform.
The scandal-hit leader has been much criticised for his handling of the economy during the recent eurozone crisis.
There had previously been much speculation that Berlusconi had lost his majority in parliament following a number of defections.
But the prime minister answered the speculation on his Facebook page, paraphrasing Mark Twain in a post that read: “Le voce di mie dimissioni sono destituite di fondamento" - "rumours of my resignation are without foundation."
Six deputies from his own party published an open letter calling for him to step aside last week, and at least two others have indicated that they will not support his government. In total, those eight would reduce his backers to 314, one short of the 315 he would need for a majority.
A previous attempt to get the financing bill through parliament last month ended in failure and a confidence vote, which Berlusconi passed.
Before Tuesday, Berlusconi, who has faced numerous trials and had his personal life dragged in front of the world's media, had passed 53 confidence votes.
He has survived political scandals that would have brought down other politicians, in part, analysts said, due to his ability to convene disparate coalition members. That ability may be deserting him.
Robert O'Daly, an economist at the Economist Intelligence Unit said the "collapse of the government seems unavoidable in the coming weeks or months".
"The president, Giorgio Napolitano, whose prerogative it is to call a general election, is keen to avoid a snap election in the midst of the deepening economic crisis," he said prior to the vote.
"We therefore expect him to call on another high ranking figure from Mr Berlusconi's coalition or a technocrat, possibly former EU commissioner Mario Monti, to try to form a government with broader parliamentary backing," he said. "The government's mandate would be limited to managing the public finances, starting some of the reforms needed to boost productivity and competitiveness, and introducing new electoral laws".
The Italian economy is in dire straits.
At Coutts, strategist Norman Villamin said that the country was following a path now well trodden by Greece, Ireland and Portugal, all of which needed bailouts from the EU and International Monetary Fund.
"Looking to the evolution of the crisis within the periphery... the sequence of events that followed a sustained rise in 10-year yields to above 6% has been consistent over the past 18 months," Villamin said.
The first stage after this threshold is a push for more austerity measures with international supervision, which is where Italy currently finds itself, he explained. The G20 effectively put Italy on an IMF watch list over the weekend, monitoring the progress of its austerity measures and offering funds, which the country declined.
In the rest of the periphery, the next stage, Villamin said, was a deterioration of the underlying economy, causing the country to miss targets set in their austerity programmes. In the case of Ireland, Portugal and Greece, this happened within two months of their yields passing 6%, and all three sought bailouts soon afterwards.
"Italy appears to be at risk of a similar outcome," Villamin added.
Although Greece has caused severe shocks to resonate across the continent, the risks to Europe and to the global financial system would be significantly greater should Italy fall deeper into its economic troubles. Italy is the third largest economy in the eurozone and a G8 member.Suggest a correction