Italian Prime Minister Mario Draghi has resigned after key coalition allies boycotted a confidence vote and withdrew their support for his government, the head of state's office said in a statement on Thursday, setting the country on course for an early election and hitting financial markets.

Draghi, an unelected former central banker who has led a broad coalition for 18 months, tendered his resignation to President Sergio Mattarella during a morning meeting at the Quirinale Palace. Mattarella's office said the president had "taken note" of the resignation and asked Draghi's government to remain on in a caretaker fashion.

Italy's government crumbled on Wednesday when three of Draghi's main partners snubbed a confidence vote he had called to try to end divisions and renew their fractious alliance.

"In the light of the vote taken by the Senate last night ... I am on my way to the president of the republic to inform him of my intentions," he said.

Earlier, Draghi informed the lower house of parliament, where he received lengthy applause from lawmakers.

The political crisis has up-ended months of stability in Italy, which the respected former central banker Draghi had helped shape.

Europe's tough response to Russia's invasion of Ukraine had boosted the country's standing in financial markets.

Italian bonds and stocks sold off sharply on Thursday just as markets were bracing for the first interest rate hike from the European Central Bank since 2011.

In early trade, benchmark 10-year Italian bond yields soared over 20 basis points to their highest in over three weeks and Italian stocks opened down 1.8%.

'Pillar of Europe'

Before the resignation, France's European affairs minister said that it will open a "period of uncertainty" and mark the loss of a "pillar of Europe."

"Italy is going to enter a period that is perhaps less stable than beforehand," Laurence Boone told France Inter.

"I want to pay tribute to Mario Draghi who is an exceptional statesman, who is a partner for France. We worked well together. He's a pillar of Europe," she added.

"It's a period of uncertainty and periods of uncertainty never put everyone at ease," she added.

Paris retains bad memories of the hostile Italian government composed of the far-right League party and the anti-establishment 5-Star Movement (M5S), which ruled for 14 months from 2018-2019.

The turmoil could not have come at a worse time for the eurozone's third-largest economy. Like many countries, Italy is facing soaring prices for everything from food to household utilities as a result of Moscow's invasion.

On top of that, it is also suffering through a prolonged drought that is threatening crops and struggling to implement its EU-financed pandemic recovery program.

Any instability in Italy could ripple out to the rest of Europe, also facing economic trouble, and deprive the EU of a respected statesman as it seeks to keep up a united front against Russia.

Coalition fractures

Opinion polls have indicated the center-left Democratic Party and the right-wing Brothers of Italy party, which had remained in the opposition, are neck-and-neck.

Democrat leader Enrico Letta said Parliament had betrayed Italy. "Let Italians show at the ballot that they are smarter than their representatives," he tweeted.

The Brothers of Italy has long been allied with the center-right Forza Italia of ex-Premier Silvio Berlusconi and the League of Matteo Salvini, suggesting that a center-right alliance would likely prevail in any election and could propel Brothers' leader Giorgia Meloni to become Italy's first female premier.

Meloni, who has been gunning for an early election since before the crisis erupted, was triumphant. "The will of the people is expressed in one way: by voting. Let's give hope and strength back to Italy," she said.

Draghi had already tendered his resignation last week after one of his partners, the populist 5-Star Movement, failed to back him in a confidence vote on measures tackling the high cost of living.

Mattarella had rejected the resignation and told him to go before parliament to see if he could keep the broad coalition going until the planned end of the legislature in early 2023.

In a speech to the Senate, Draghi made a plea for unity and set out a series of issues facing Italy ranging from the war in Ukraine to social inequality and rising prices.

But the 5-Star once again decided not to back him, saying he had not addressed their core concerns.