Italian Prime Minister Mario Draghi resigned yesterday after his national unity government fell apart, 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 in a meeting with President Sergio Mattarella.

Mattarella said he had dissolved parliament and early elections would be called, following the resignation of Draghi.

"The political situation led to this decision," Mattarella said in a brief televised address.

A bloc of conservative parties, led by the far-right Brothers of Italy, looks likely to win a clear majority at the next election, a study of opinion polls showed this week.

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

The political crisis has up-ended months of stability in Italy, during which Draghi had helped shape Europe's tough response to Russia's invasion of Ukraine and had boosted the country's standing in financial markets.

Draghi drew warm applause from lawmakers when he made a brief appearance in the lower house of parliament yesterday.

"Even central bankers have their hearts touched sometimes," he quipped as he received the ovation.

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

The Italian 10-year government bond briefly yield shot up more than 20 basis points to 3.7%, although the yield was some way off the 4%-plus levels seen in June.

"It is a big blow to Italy's ability to deliver policies and reforms over the near term," said Lorenzo Codogno, head of LC Macro Advisers and a former senior Italian Treasury official. "There will be delays and disruptions with early elections, and most likely no budget by year-end."

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 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 had 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. In addition, the rightist Forza Italia and League coalition parties decided to shun the vote, pushing for a government without 5-Star.

In a sign of the tensions brought to the surface by the end of the Draghi government, two ministers from Forza Italia said they would leave the centre-right party.

Public administration minister Renato Brunetta and Mariastella Gelmini, minister for regional affairs, both quit the party led by Silvio Berlusconi.