Italian politicians and business leaders heaved a collective sigh of relief at the news, which came on Monday as the government was preparing legislation aimed at forcing Fazio from office.

The Bank of Italy said Fazio's resignation would be formally presented to the bank's Superior Council on Tuesday.

The bank said in a statement: "The decision, made autonomously with a clear conscience, was taken to restore calm, in the greater interest of the country and the Bank of Italy."

Fazio's position became untenable after it emerged last week that he was being investigated by Milan prosecutors for suspected insider trading as part of a wider inquiry into allegations of rampant fraud at bank Banca Popolare Italiana.

Lavish gifts

Adding to the pressure, the European Central Bank (ECB) raised questions over allegations the 69-year-old Fazio received lavish gifts from Gianpiero Fiorani, Pop Lodi's former CEO, who was arrested last week on suspicion of embezzlement.

The flurry of events persuaded many supporters, including the Roman Catholic Church, to abandon him and encourage his old enemy, Giulio Tremonti, the economy minister, to draw up a bill to force him from his position.

Italy's next central bank chief
will likely get a five-year term

Silvio Berlusconi, the prime minister, welcomed Fazio's resignation, saying it was an act "of great responsibility". He added that he did not know who might take his place.

It is up to the Bank of Italy's superior council to pick the successor, with the government and president then asked to ratify the nomination.

However, in its endeavours to force Fazio out, Tremonti has indicated he was planning to pass a law by which the government would pick the governor and then seek parliamentary approval.

Under the terms of the regulatory reform drawn up by the government, Fazio's successor will almost certainly be offered a renewable five-year term.

Spotless reputation

Fazio had led the Bank of Italy since 1993 and used to enjoy a spotless reputation as a wise manager of monetary policy as Italy battled to secure membership of the euro currency.

But his good name took a beating this year after allegations emerged in July that he had unfairly favoured Pop Italiana in a bid battle against Dutch rival ABN AMRO for control of Banca Antonveneta.