Italy's outgoing Prime Minister Silvio Berlusconi waves as he leaves his residence in downtown Rome, Nov 12, 2011. [Photo/Agencies]

ROME - Silvio Berlusconi resigned on Saturday to make way for an emergency government Italians hope will save them from financial ruin as thousands of jeering protesters shouted "clown, clown" and toasted the end of a scandal-plagued era.

Berlusconi, who failed to secure a majority in a crucial vote on Tuesday, stepped down as prime minister after parliament passed a package of measures demanded by European partners to restore market confidence in Italy's strained public finances.  

Former European Commissioner Mario Monti is expected to be given the task of trying to form a new administration to face a widening financial crisis which has sent Italy's borrowing costs to unmanageable levels.

More than a thousand demonstrators waving banners mocking Berlusconi flocked to the president's residence at the Quirinale Palace as the motorcade carrying the billionaire media entrepreneur, who has been Italy's longest serving prime minister, entered.

The crowd grew so unruly that Berlusconi was forced to leave secretly via a side entrance and return to his private residence.

Cheers broke out when they heard that Berlusconi had resigned and the square broke out into a party atmosphere. People sang, danced and some broke open bottles of champagne.

An orchestra near the palace played the Hallelujah chorus from Handel's Messiah. "We are here to rejoice," one said.

Demonstrators chanting "resign, resign, resign" also gathered outside the prime minister's office and parliament, heckling ministers as they walked between the two buildings.

A small group of pro-Berlusconi demonstrators gathered outside his residence but were hugely outnumbered by opponents.

After the resignation, hundreds shouting "Jail, Jail, Jail," moved from the presidential palace to Berlusconi's residence to continue the noisy celebrations below his windows.

"This is something that deeply saddens me," the Italian news agency Ansa quoted Berlusconi as telling aides.

President Giorgio Napolitano will begin consultations with political leaders at 0800 GMT on Sunday morning. He was expected to ask Monti for form a government on Sunday night.

Italy, the euro zone's third largest economy, came close to disaster this week when yields on 10-year bonds soared over 7.6 percent, the kind of level which forced Ireland, Portugal and Greece to seek international bailouts.

Berlusconi, who failed to secure a majority in a vote on Tuesday, promised to resign once parliament passed the package of economic reforms demanded by European partners to restore confidence in Italy's battered public finances.  

Monti, named by Napolitano as a Senator for Life on Wednesday, is expected to appoint a relatively small cabinet of technocrat specialists to steer Italy through the crisis.

With the next election not due until 2013, a technocrat government could have about 18 months to pass painful economic reforms but will need to secure the backing of a majority in parliament and could fall before then.

With a public debt of more than 120 percent of gross domestic product and more than a decade of anaemic economic growth behind it, Italy is at the heart of the euro zone debt crisis and would be too big for the bloc to bail out.

Financial markets have backed a Monti government and as prospects of Berlusconi going became firmer last week, yields dropped below the critical 7 percent level, although they remain close.

"We don't yet have a new government in Italy and we have to wait, but I'm sure if Mario Monti will be appointed he will do whatever is necessary in order to restore the confidence of the financial markets in Italy," Alessandro Profumo, former head of Unicredit, Italy's largest bank, told Reuters.