President Giorgio Napolitano held consultations on Thursday with political leaders following the surprise resignation of Romano Prodi as premier.
Prodi handed in his resignation to Napolitano on Wednesday after his centre-left government was defeated in the Senate in a vote on its foreign policy.
There was no constitutional requirement for Prodi to quit, since the ballot was not a confidence vote. But Foreign Minister Massimo D'Alema had upped the stakes by saying ahead of the vote that the government would quit if it lost.
Napolitano is now holding talks with parliamentary speakers, party whips and leaders and former heads of state, after which he will decide how to proceed.
His last meeting will be at around 20:00 on Friday with his predecessor, Carlo Azeglio Ciampi.
Prodi, meanwhile, is holding a summit on Thursday night with the leaders of the nine parties in his coalition.
The Silvio Berlusconi-led opposition is calling for snap elections.
PRESIDENT'S OPTIONS.
Political analysts said Napolitano was unlikely to call fresh elections as a way out of the crisis.
They stressed that the head of state could simply ask Prodi to verify whether his nine-month-old government still held a parliamentary majority by calling a confidence vote, or ask him to form a new government.
But Napolitano could formally accept Prodi's resignation if the outcome of his talks indicate that the government lacks parliamentary support.
In that case, he could ask another member of the centre-left coalition to form a government - such as Interior Minister and former premier Giuliano Amato - or choose a top institutional figure to form a short-term, non-political caretaker government.
The main parties in Prodi's coalition, including the Communist Refoundation Party (PRC), have confirmed their support for the ex-European Commission chief.
The PRC and other hard-leftists are mainly responsible for the foreign policy divisions, angered by Prodi's refusal to withdraw Italian troops from a peacekeeping mission in Afghanistan and his approval of the expansion of a US military base in the northern city of Vicenza.
Wednesday's vote debacle was partly caused by the defection of two leftist senators, one of them a PRC member.
BROADENING OF GOVERNING ALLIANCE POSSIBLE.
Prodi's grip on power has always been precarious.
Although he has a solid majority in the House, he holds only one more seat than the opposition in the Senate.
At the same time, the nine parties in his coalition range from Communists to Catholics, making unity on government policy a constant endeavour.
Top members of Prodi's coalition said on Thursday that the only long-term solution to the crisis was an extension of the alliance, to give it a more solid base in the Senate.
Several lawmakers with the Democratic Left (DS), the largest party, said they were "exploring the possibility of broadening the majority to include single members of the opposition".
They said one possibility was Senator Marco Follini, the former head of the centrist, Catholic UDC - a party which has broken ranks with Berlusconi but remains in opposition.
The centrist Daisy party, the governing alliance's No.2 party, agreed that "a new phase has to be launched based on greater parliamentary consensus".
Sources close to Follini, who has formed a new party called Italy in the Centre, said the senator was willing to back Prodi providing there was a "fresh start".
They said this meant a more centrist approach in government policies.
Prodi himself remained tightlipped on the possibility of bringing in Follini.
Such a move could place the premier in difficulty over a key policy issue of giving rights to cohabiting heterosexual and same-sex couples.
Prodi has promised to introduce such a law but this has already pitted him against Catholic centrists in his coalition and triggered fierce opposition from the Church.
Up until now, Prodi has been forced to resort to a series of confidence votes in the Senate to keep rebel allies in line.
He has also been given a helping hand in the upper chamber by seven life senators.
But on Wednesday, one life senator voted against the government and two others abstained, while a fourth was absent for health reasons.
The government subsequently failed to make the 160-majority required by two votes.
For 67-year-old Prodi, it was a case of deja vu - his first, 1996 government was brought down in 1998 by the PRC.
International credit agencies said on Thursday that the crisis would not affect their ratings for Italy for the time being but that they were following developments closely.
Several agencies downgraded Italy's debt last October citing among other things the weakness of the governing coalition.
Investors, meanwhile, appeared to brush off the crisis, with share prices rising on the Milan bourse.
Berlusconi's commercial TV network Mediaset also rose as investors speculated that a media reform bill which would sharply reduce the company's revenues could now be shelved.
