By Steve Scherer
ROME (Reuters) - Italian Prime Minister Mario Monti announced on Saturday that he would resign once next year's budget is approved, two days after Silvio Berlusconi's party withdrew its parliamentary support for his technocrat government.
Only hours before the announcement, Berlusconi, who has stepped up attacks on Monti over recent weeks, said he would run to become premier for a fifth time on a platform that attacks the former European Commissioner's stewardship of the economy.
Parliament is already poised to pass the budget by Christmas, and so Monti's resignation probably brings the expected vote forward by no more than a month to February. Elections must follow no more than 70 days after President Giorgio Napolitano dissolves parliament.
Monti's move turns the tables on Berlusconi, who seemed to have once again seized a political opportunity to keep his party in the political game just a year after being forced to resign amid a sex scandal and a debt crisis.
It will also increase speculation that he could be eyeing a run as a candidate in the election himself.
At a conference in France earlier, Monti, widely credited with restoring Italy's international credibility after the scandal-plagued Berlusconi era, appeared to take aim at Berlusconi, warning against "populism".
He said Italy should not go back to where it was when he took over for Berlusconi a year ago.
Following a two-hour meeting with Napolitano, he warned that not approving the budget "would render more serious the government crisis, also at a European level," and said that after it is approved, his resignation would be "irrevocable".
Leaders of both Berlusconi's center-right People of Freedom (PDL) party and the center-left Democratic Party (PD), which is leading in the opinion polls, said they were willing to accelerate the passage of the budget.
"Faced with the irresponsibility of the right that betrayed a commitment it made a year ago before the whole country... Monti responded with an act of dignity that we profoundly respect," said PD leader Pier Luigi Bersani.
"We are ready to approve the budget in the fastest possible manner," he said in a statement.
Italians will vote in the middle of a severe economic crisis, with a recession that began mid-way through last year showing no signs of abating, a massive public debt and unemployment at 11.1 percent, a record high.
With the support of a cross-party alliance including both the PD and the PDL, Monti imposed tax hikes and spending cuts to bring borrowing costs under control and undertook a series of reforms to improve the competitiveness of the economy.
But Berlusconi said on Wednesday that the former economics professor's austerity policies had left Italy facing a "recessive spiral without end".
The PDL withdrew parliamentary support for Monti on Thursday, driving up the difference between German and Italian benchmark bonds by about 30 basis points.
"On Monday morning the markets will judge this latest outburst by Berlusconi and they certainly will not judge it positively," PD vice president Enrico Letta commented. Letta added that elections now were likely in February.
Berlusconi's center-right PDL lags the PD by at least 16 percentage points in opinion polls, and also trails the anti-establishment 5-Star Movement, which has surged to prominence on a tide of public anger against the mainstream political class.
Monti's move will fuel speculation over whether he intends to run to lead the country next year once he has resigned. So far he has said he will step in only if the election result is unclear, but there has been growing speculation he could join forces with a centrist group.
Financial markets have been closely watching the political upheaval in Italy and many in the business establishment have hoped for a second term from Monti.
However Berlusconi, Italy's most proved election campaigner, said that he would not give in easily.
"I race to win," Berlusconi told reporters at the practice field for AC Milan, the soccer club he controls.
"To win, everyone said there had to be a tested leader. It's not that we did not look for one. We did, and how! But there isn't one... I'm doing it out of a sense of responsibility."
The media magnate has ample resources to back his bid - the country's biggest television network, its biggest magazine publisher and a family-owned newspaper.
Echoing comments by the leader of the 5-Star Movement, Beppe Grillo, Berlusconi criticized the single currency earlier this year and has slammed Germany's influence on European policy.
In his blog, Grillo said Berlusconi is running for office because he knows the average Italian "is literally terrified about the prospects of five more years of Monti-like rule".
(With additional reporting by Elvira Pollina in Milan, Giselda Vagnoni in Rome, and Lionel Laurent in Cannes, France; Editing by Stephen Powell)