Italy's borrowing rates over the short and long-term have soared over 7.0 percent, rattling financial markets around the world.
Parliament will pass a package of crucial economic reforms by Sunday at the latest, after which Prime Minister Silvio Berlusconi will resign in a bid to halt market mayhem, officials said.
The measures, which were promised by Berlusconi at a summit in Brussels last month, are aimed at stemming the turmoil that pushed Italy's borrowing rates to alarming levels but Europe has already warned "extra measures" may be needed.
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Borrowing rates over the short and long-term soared to levels that could make it impossible for Rome to keep financing its 1.9-trillion euro ($2.6 trillion) debt.
The market panic prompted President Giorgio Napolitano to step in to assure investors that the reforms would be adopted "within days," saying Italy would not endure "a prolonged period of political and parliamentary inactivity."
Final approval of the reforms will come as early as Saturday and by Sunday at the latest, Italian media reports said, citing parliamentary sources.
The upper house is expected to approve the package of reforms by Friday, leaving the lower house to adopt it over the weekend.
Napolitano said he would then launch talks on a new government "immediately" after Berlusconi's exit and would call elections if those talks fall through.
The president said Italy's bond rates had reached "alarming" levels, adding that "emergency measures" could be adopted in case of a political crisis.
Berlusconi earlier said he would prefer early elections in February adding that he would not be running for office, effectively announcing the end of a political career spanning two decades after a parliamentary revolt on Tuesday.
Italy's stock market initially opened higher but then quickly plunged more than 4.0 percent. It recovered slightly after Napolitano's comments.
Shares in Berlusconi's Mediaset business empire weighed heavily on the market and were down more than 10 percent near the end of the session.
Investors fear Italy could fail to implement reforms and become the next victim of the debt crisis gripping Europe in the wake of Greece, Ireland and Portugal, fellow eurozone nations that have been forced to seek bailouts.
German Chancellor Angela Merkel added to the pressure, saying Europe needed "structural changes" and not just "declarations of intent".
A German government spokesman said Italy should follow France's example in implementing austerity measures and show "the will" for structural reforms.
The uncertainty in Italy as well as continued political wrangling in Greece also helped drag down the value of the euro against the dollar on Wednesday.
Apart from elections, other scenarios for Italy include an expansion of the current centre-right coalition, or the formation of a national unity government.
Berlusconi named Angelino Alfano, a 41-year-old former justice minister who became the leader of the ruling People of Freedom (PDL) party this year, as his replacement for elections and said there should be a vote in February.
Other possible candidates to replace Berlusconi include former EU commissioner Mario Monti, former prime minister Giuliano Amato and Berlusconi's shadowy cabinet secretary Gianni Letta.
European Union and European Central Bank officials also arrived in Rome Wednesday as part of a special EU-IMF surveillance mechanism agreed last week, as the European Commission urged Italy to make extra effort to cut its debt.
"As we estimate that in the current economic context the planned fiscal strategy dopes not ensure the achievement of a balanced budget in 2013, additional measures will be needed," read a message from the EU.
"Are contingency measures being prepared already now and, if so, what kind of measures are they? Would they take the form of further expenditure restraint, based on the results of a thorough spending review?" it added.
Berlusconi had promised his fellow eurozone leaders that he would overhaul Italy's pensions system and accelerate sales of state assets, but the reforms have stalled to the intense frustration of Germany and others.
The larger-than-life premier is currently a defendant in three trials for bribery, tax fraud, abuse of power and paying for sex with a 17-year-old girl.
Analysts said Berlusconi's resignation could speed up these trials and prevent him from pushing through laws to shield him from justice.
Asked, in an interview with La Stampa, what he would do in the future, Berlusconi said he could "help out in election campaigns, something I've always been good at."
Or, he added: "Maybe I will go back to being president of AC Milan."
