Italian leftist leader Pier Luigi Bersani has lost his bid to form a new government after failing to break a political deadlock.
Bersani, a former communist, had been given a mandate last week by Giorgio Napolitano, the Italian president, to try and muster enough support to govern.
The deadlock, precipitated by last month's inconclusive elections, leaves the eurozone's third largest economy in limbo.
Bersani reported to Napolitano on Thursday that he had failed to gather the parliamentary backing needed to rule.
"My work in these days has not led to a positive result," he said after talks with Napolitano.
The Democratic Party (PD) said its leader had not given up on forming a government.
Observers said Napolitano could now move to choose a different figure to lead Italy.
Napolitano "will take immediate initiatives that will allow him to ascertain personally the possible developments", said Donato Marra, the secretary general of the presidency.
The president is set to begin a new round of consultations with political parties at 1000 GMT on Friday, the presidency said.
Napolitano could hand over the reins to a technocrat government similar to the one headed up by outgoing Prime Minister Mario Monti, who was brought in to rescue Italy from the debt crisis in November 2011.
Bersani's failure to muster support returns Italy to square one, after elections in February saw the centre-left scrape a victory in the lower house but fail to win a key majority in the upper house.
Napolitano had made it clear that Bersani would have to come up with firm guarantees of support from the other parties in order to win a full mandate to form a government.
The political turmoil in Italy has been watched closely by Europe and the markets, which fear instability in the debt-laden country could spark tumult in the eurozone, particularly after a bailout dispute in Cyprus reignited fears over the euro area debt crisis.
Financial observers warn that the longer the country goes without a government, the deeper the already troubled economy may slump - bad news for ordinary Italians, who have already been hit hard by the worst recession in Italy for 20 years.