- Dec 5, 2016 16H:14 GMT/UTC/ZULU TIME
- Europe
Outgoing Italian PM Matteo Renzi has met the country's president following a heavy defeat in a constitutional referendum on Sunday.
Mr Renzi, who resigned after the vote, and President Sergio Mattarella will be anxious to ease fears of instability and a deeper crisis for Italy's troubled banking sector.
President Mattarella must either appoint a new PM or trigger elections.
European politicians reacted calmly to the result, saying there was no crisis.
Meanwhile financial markets have stabilised after initial falls on news of Mr Renzi's defeat.
However, there are concerns about Italy's fragile economy in the longer term.
What will happen next?
Though Mr Renzi has already met Mr Mattarella, he will not hand in his resignation to him until after a final cabinet meeting due to take place at 18:30 local time (17:30 GMT).
The president may ask him to stay on at least until parliament has passed a budget bill due later this month, but this seems unlikely in view of the scale of his defeat.
In spite of the pressure from the opposition, early elections are also thought to be unlikely.
Instead, the president may appoint a caretaker administration led by Mr Renzi's Democratic Party, which would carry on until an election due in the spring of 2018.
Finance Minister Pier Carlo Padoan is the favourite to succeed Mr Renzi as prime minister.
Why did he lose?
With most ballots counted, the No vote leads with 60% against 40% for Yes, with a 70% turnout, a heavier than expected defeat for the government.
Mr Renzi staked his political future on his attempt to change Italy's cumbersome political system. He wanted to strengthen central government and weaken the Senate, the upper house of parliament.
EPA
His opponents - including some within his own party - had argued that the reforms would give the prime minister too much power. The electorate agreed.
But the referendum was more than a vote on constitutional reform, it was widely regarded as a chance to reject establishment politics.
It was a resounding victory for the No camp, a medley of populist parties headed by the Five Star Movement, which capitalised on Mr Renzi's declining popularity, years of economic stagnation, and the problems caused by tens of thousands of migrants arriving in Italy from Africa.
In a video posted on Twitter (in Italian), Mr Renzi defended his record, saying exports and job numbers were up and unemployment was down to 11.7%.
Five Star says it is getting ready to govern Italy. Its leader Beppe Grillo said an election should be called "within a week".
President Mattarella, who praised the high voter turnout, called for a political climate with "serenity and mutual respect".
There are obligations and deadlines which Italy's institutions will have to honour "guaranteeing a response that meets the problems of the moment," he said.
How is Europe reacting?
The result is being seen as a blow to the EU, although there is no question of Italy following the UK out of the door.
Both Five Star and the Northern League are opposed to the eurozone but not to membership of the EU itself.
REUTERS
Jeroen Dijsselbloem, who heads the group of 19 eurozone countries, denied any impending crisis.
"It doesn't really change the situation economically in Italy or in the Italian banks. The problems that we have today are the problems that we had yesterday," he said.
Reuters news agency quoted German Finance Minister Wolfgang Schaeuble as saying there was no reason for a euro crisis but that Italy urgently needed a functioning government.
Meanwhile, a spokesman for Chancellor Angela Merkel said she "took note with regret" of Mr Renzi's resignation but Germany would offer to work closely with the next Italian government.
TWITTER
But the leader of the far-right Front National in France, Marine Le Pen, tweeted: "The Italians have disavowed the EU and Renzi. We must listen to this thirst for freedom of nations."
What will it do to the economy?
Markets seemed to have taken Mr Renzi's departure in their stride in the short-term. The euro fell initially to a 20-month low but rebounded again. Shares in Italian banks lost ground on Monday afternoon, following a dip and rebound in the morning.
But there are concerns over the long-term financial stability in the eurozone's third largest economy.
The economy is 12% smaller than when the financial crisis began in 2008.
The banks remain weak and the country's debt-to-GDP ratio, at 133%, (second only to Greece's in the eurozone) means many Italian banks are in need of refinancing.
There is a risk that the failure of a major bank - such as the troubled Banca Monte dei Paschi di Siena - could set off a wider crisis, but repairing the banks becomes more difficult amid political uncertainty.
The head of Germany's Bundesbank, Jens Weidmann, said the result was "not the end of the world" but that a slowdown in the pace of economic reforms should be expected.
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