His decision to quit after just two and a half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year.

The euro fell to 20-month lows against the dollar, with markets worried that instability in the euro zone’s third largest economy could reignite a dormant financial crisis and deal a hammer blow to Italy’s fragile banking sector.

Renzi’s resignation could open the door to early elections next year and to the possibility of an anti-euro party, the opposition 5-Star Movement, gaining power in the heart of the single currency. 5-Star campaigned hard for a ‘No’ vote.

“I take full responsibility for the defeat,” Renzi said in a televised address to the nation, saying he would hand in his formal resignation to President Sergio Mattarella on Monday.

Mattarella will have to embark on a round of consultations with party leaders before naming a new prime minister – Italy’s fifth in as many years – who will be tasked with drawing up a new electoral law.

Early projections said Renzi managed to win little more than 40 per cent of the vote on Sunday following months of bitter campaigning that pitted him against all major opposition parties, including the anti-system 5-Star Movement.

Italy’s parties will now have to work together on the new electoral law, with the 5-Star urging a swift deal to open the way for elections in early 2017, a year ahead of schedule.

Opinion polls show Renzi’s Democratic Party (PD) is neck-and-neck with the 5-Star, which has called for a referendum on Italy’s membership of the euro currency.

The referendum, if passed, would have diluted the power of Italy’s upper house and increased state power at the expense of local authorities.

Candidates to replace Renzi

Italian President Sergio Mattarella is due to appoint a new prime minister after Matteo Renzi said he would resign in the wake of his constitutional referendum defeat.

The new prime minister is expected to come from, or be associated with, Renzi’s Democratic Party (PD), which is the dominant force in parliament. Both houses of parliament have to approve the new government with votes of confidence.

Here is a list of the main candidates for the job.

PIER CARLO PADOAN: The 66-year-old economy minister is a left-leaning economics professor who previously held top positions at the Organisation for Economic Coordination Development and the International Monetary Fund and advised centre-left premiers Massimo D’Alema and Giuliano Amato.

PIETRO GRASSO: The 71-year-old president of the Senate was first elected to parliament for the PD in 2013. Prior to that he was a top magistrate, leading Italy’s anti-Mafia investigative agency from 2005 until his entry into politics.

DARIO FRANCESCHINI: The 58-year-old culture minister is a PD bigwig who led the party in 2009. A career politician who started out as a left-leaning Christian democrat, he has been in parliament since 2001 and held other ministerial posts in 1999-2001 and 2013-2014.

GRAZIANO DELRIO: The 56-year-old transport minister is a Renzi loyalist who initially served in his government as cabinet secretary. Known as a devout Catholic and father of nine, he trained as a doctor and was mayor of Reggio Emilia, his home town, from 2004 to 2013.

CARLO CALENDA The 43-year-old industry minister worked at Ferrari and employers’ lobby Confindustria before a failed 2013 run for parliament on the centrist list of former premier Mario Monti. He was then appointed deputy minister of economic development, joined the PD and, earlier this year, was briefly Italy’s EU ambassador.
– AAP