Berlusconi's attempt to use the partial elections as proof of his enduring popularity backfired as Italians tired of the slew of sex and crime scandals engulfing the premier expressed their discontent at the ballot box.
Defying expectations, the centre-right candidate, incumbent mayor Letizia Moratti, was left trailing with 41.6 percent in Sunday and Monday's vote and now faces a runoff with centre-left Giuliano Pisapia, who won 48 percent.
"Surprise in Milan, Pisapia in the lead," the Milanese daily Il Corriere della Sera said in an editorial entitled "The slap."
"The runoff in Milan is humiliating for Silvio Berlusconi, who turned the result into a referendum of both him and his government and has received a slap in the face both personally and politically," columninst Massimo Franco wrote.
As voters wait for a second-round of local elections set for May 29 and 30, the result "forecasts a period of instability and settling of scores in the centre-right," and Berlusconi "risks becoming the scapegoat," he said.
Franco Pavoncello, political science professor at Rome's American John Cabot University, told AFP: "This surprising, negative result will set off a crisis at the heart of the government."
Berlusconi, whose popularity reached a record low of 31 percent in a recent survey, had campaigned hard for the re-election of the mayor of Milan, the northern financial hub where the media magnate was born and made his fortune.
As voters prepared to head to the urns on Sunday, the premier said it was "unthinkable not to win in Milan," stressing that the coalition between his People of Freedom party and the Northern League was "the only moderate force."
The government has relied heavily on the support of the anti-immigration League to sustain it while their beleaguered premier battled through a series of legal trials and accusations of having paid for sex with an underage girl.
"This is a bit the beginning of the end of the coalition. Within the League, they are beginning to question the validity of the alliance with Berlusconi: is it an advantage or a handicap?" said Pavoncello.
"If Milan should fall, the League will pull out of the government," which would bring it crashing down, he added.
But Il Corriere's Franco was more cautious about the centre-left's triumph, saying: "In two weeks, the runoffs could hand victory back to the majority, which lost in Milan... because it was too self-assured and aggressive."
In the meantime, the left -- used to being defeated by Berlusconi -- is openly celebrating.
"The figures clearly show that we're winning and they're losing," said Pier Luigi Bersani, head of the opposition Democratic Party (PD), also celebrating the centre-left's outright wins in the "red" cities of Bologna and Turin.
Berlusconi has not yet spoken in public about the humiliating Milan loss.
"The fairytale is over," wrote columnist Massimo Giannini in the left-wing newspaper La Repubblica.
"The voters' answer is unequivocal: the prime minister has lost his referendum," he said.
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