Italian Prime Minister Matteo Renzi vowed to resign after suffering a crushing defeat on Sunday in a referendum on constitutional reform, tipping the euzo zone's third-largest economy into political turmoil.
His decision to quit after just two and a half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year.
The euro fell to 20-month lows against the dollar, with markets worried that instability in the euro zone's third largest economy could reignite a dormant financial crisis and deal a hammer blow to Italy's fragile banking sector.
Renzi's resignation could open the door to early elections next year and to the possibility of an anti-euro party, the opposition 5-Star Movement, gaining power in the heart of the single currency. 5-Star campaigned hard for a 'No' vote.
"I take full responsibility for the defeat," Renzi said in a televised address to the nation, saying he would hand in his formal resignation to President Sergio Mattarella on Monday.
Mattarella will have to embark on a round of consultations with party leaders before naming a new prime minister -- Italy's fifth in as many years -- who will be tasked with drawing up a new electoral law.
Early projections said Renzi managed to win little more than 40 percent of the vote on Sunday following months of bitter campaigning that pitted him against all major opposition parties, including the anti-system 5-Star Movement.
Italy's parties will now have to work together on the new electoral law, with the 5-Star urging a swift deal to open the way for elections in early 2017, a year ahead of schedule.
Opinion polls show Renzi's Democratic Party (PD) is neck-and-neck with the 5-Star, which has called for a referendum on Italy's membership of the euro currency.