Italian Prime Minister Romano Prodi faces a choice on Thursday whether to resign or face a confidence vote in the Senate he is expected to lose, obliging him to step down anyway.

The 68 year-old Prodi is trying to prolong the life of his government which was thrown into crisis when a small coalition party withdrew its support this week.

Prodi's departure after little more than 18 months in power would raise the spectre of prolonged uncertainty for the euro zone's third largest economy, further delaying much needed economic reforms as a global slowdown looms.

After a day of negotiations on Wednesday to try to keep his government afloat amid speculation he was heading for the palace of President Giorgio Napolitano to resign, Prodi finally decided to delay a decision until Thursday.

On financial markets, where investors sought safe bets as the international economy weakens, the spread between Italian government bonds and German bunds widened to levels not seen for 6-1/2 years.

"He should resign, but he's finished in any case. I want elections," said centre-right opposition leader Silvio Berlusconi, who has a clear lead in opinion polls.

If Prodi does step down it remains to be seen whether Napolitano will heed Berlusconi's call and dissolve parliament.

Many analysts think he would try instead to muster support for an interim government with a limited mandate to reform Italy's complicated electoral law which has been widely blamed for the instability of the Prodi administration.

Such a government might be led by a non-party technocrat, a formula Italy has turned to before in times of crisis and which some economists, disappointed by successive governments' inability to make progress on reforms, view quite positively.

"It often doesn't make much difference who governs Italy but technical governments have actually done quite well in the past," said Holger Schmieding of Bank of America.

BLEAK PROSPECTS

Prodi won a confidence vote on Wednesday in the lower house, where he has a clear majority, but his prospects look bleak in the Senate where a second vote is scheduled for Thursday evening, some time after 6 p.m. British time.

His once slim Senate majority has apparently been erased by the defection of the Catholic Udeur party led by former Justice Minister Clemente Mastella, and the centrist Liberal Democrats.

If Prodi decides to face the Senate vote he will be banking on the controversial support of a handful of unelected life senators who have already rescued him on several occasions.

On paper, even their votes would not be enough this time, suggesting Prodi would be hoping for a dramatic, last-minute change of heart from his former allies or that some opposition senators might, equally dramatically, come to his rescue.

He is expected to consult with Napolitano at the president's palace before the vote even if he decides against resigning.

Ordinary Italians, who have seen 61 governments since World War Two, seemed jaded by the prospect of more turmoil.

"We had hoped they would last a bit longer, but we're used to it," said Franco Fonte in a Rome cafe. "I just hope at least they can reform the electoral system."