His vow to quit after the approval of next year's budget has raised the prospect of an election in February instead of April and heightened uncertainty over who will succeed him.

Policy makers foresee serious consequences:

"Italy's credibility had greatly improved in recent months, it had regained its rightful position in Europe. If Italy engages in a new period of instability that will make it much more difficult to solve the euro crisis," warned the president of the World Policy Conference, Thierry de Montbrial.

Monti's decision came after Silvio Berlusconi's party withdrew its support; The former prime minister is even considering making a comeback.

Martin Schulz, President of the European Parliament is among several highly critical European politicians:

"Silvio Berlusconi was Italy's prime minister for a very long time and the result of that is very well known. His government was one of the causes of the crisis in which Italy and Europe is in today."

The markets are wary. Analysts say the election will produce a fragmented Italian parliament with a fragile coalition government unable to push through much needed reforms.