A government source on Saturday said Berlusconi has taken over the economy portfolio on an interim basis.

"Tremonti has resigned. The meeting tonight went badly," the source said.

"Berlusconi will take over as economy minister for the time being," he said, adding that a cabinet meeting called for later on Saturday to discuss Italy's budget problems has been cancelled.

Tremonti's resignation came after weeks of infighting within the coalition over economic policy that has threatened to tear apart the centre-right administration.

Tremonti is a member of Berlusconi's Forza Italia party and has been a crucial figure in his three-year-old government, managing thus far to meet strict EU budget rules but failing to revive Italy's sluggish economy.

His resignation comes three days prior to a crucial EU finance ministers meeting, due to consider Italy's budget deficit.

Tremonti's resignation is bound to further destabilise Berlusconi's four-party coalition.