By Stephen Brown and Robin Pomeroy
ROME (Reuters) - Italian Prime Minister Romano Prodi resigned on Thursday after his centre-left government lost a confidence vote in the Senate, prompting opposition leader Silvio Berlusconi to demand immediate elections.
"Now we must go to vote. We will say what we want to do in the first 100 days of our government," said conservative former prime minister Berlusconi, who has led Prodi in opinion polls.
But President Giorgio Napolitano may first appoint an interim government to reform a messy electoral system, which in 2006 landed Prodi with a tiny Senate majority and an unstable nine-party coalition ranging from Catholics to communists.
Analysts said the demise of the 61st government since World War Two should not hurt economic growth prospects, as Prodi had been too busy surviving politically to carry out deep reforms, but could threaten a recent improvement in public finances.
Many Italians hope for electoral reform to cure chronic instability, illustrated by the fact that Prodi's 20-month spell in power was the seventh longest government in post-war Italy.
"This isn't necessarily bad news, it all depends what comes after Prodi," said Unicredit MIB economist Marco Valli. "Markets don't like uncertainty but if what follows Prodi is a stronger government, then that could be positive."
Berlusconi's senators opened champagne to celebrate, earning a rebuke from Senate President Franco Marini who said: "Get rid of that bottle, we're not in a pub here." Rome taxi drivers who support him honked their horns and shouted: "We've done it!"
Prodi, 68, was undermined by his own allies, just as when his first spell in office was cut short in 1998. This time a small Catholic party's defection erased his tiny majority in the Senate and made a vote of no confidence almost inevitable. Continued...
Prodi in 2006. 
Romano Prodi, the Prime Minister of Italy, resigned Thursday evening after losing a vote of confidence in the Senate by a vote of 161-156.

The vote comes in the wake of a growing crisis regarding corruption charges against Prodi's former Minister of Justice, Clemente Mastella.  Prodi's fate was sealed when the UEDUR Populars, a smaller component of Prodi's ruling Olive Tree coalition, broke ranks and voted against him.

Prodi did win the confidence vote in the Chamber of Deputies, but was not expected to win the vote in the Senate.  Some believed he would resign before the Senate vote and avoid the embarrassment of losing the majority approval of Parliament.

The President of Italy, Giorgio Napolitano, must now decide whether to appoint a new Prime Minister or to dissolve Parliament and schedule new elections. Some want a reform of election rules before a new election is called. Recent opinion polls indicate that Silvio Berlusconi would become Prime Minister once more if elections were held.

It was the current election rules, introduced by Berlusconi during his most recent stint as Prime Minister, that allowed Prodi to assume power after the 2006 parliamentary elections.

"Now we must go to vote. We will say what we want to do in the first 100 days of our government," said former prime minister and opposition leader Berlusconi, demanding elections.

In a speech prior to the vote, Prodi said, "Stopping the government's work is a luxury Italy cannot afford," and warned that Italy "cannot afford a power vacuum."