Italian Prime Minister Mario Monti was set to resign yesterday after a year of battling the debt crisis with austerity and reforms as lawmakers gave final approval to a budget bill that will pave the way for early elections.

Monti said earlier that he will step down once the vote is approved, kicking off a campaign that will likely see Italy go to the polls on February 24, with former premier Silvio Berlusconi and centre-left leader Pier Luigi Bersani already in the running.

After Christmas mass in the Prime Minister's residence, Monti joked about the end-of-world Mayan prophecy saying: "A year ago this government was only just beginning. Now we will have to wrap up and it's not the fault of the Mayas."

He then addressed Italy's ambassadors abroad saying his speech would be his "last act" before handing in his resignation.

"Thank you for these difficult but fascinating 13 months," he said.

Monti could also join the campaign and is under strong domestic and international pressure to do so. He is expected to reveal his future political ambitions at an end of year press conference scheduled for Sunday.

Sources close to the technocrat premier insist that he has not yet decided whether to enter the fray, despite appearing to launch a bid for a weighty role in the campaign with a rousing speech at a Fiat factory yesterday.

Some political observers have said Monti could campaign as unofficial leader of a centrist coalition that has been likened to the Christian-Democrats who dominated Italy for decades.

Monti's name cannot officially be on the ballot as he is already a senator for life, but he can still be appointed to a post in government including prime minister or finance minister after elections.

The centrist agenda will include "historic reforms" and "far deeper liberalisation than we have witnessed so far", sources quoted by the Corriere della Sera daily.

Monti, 69, defended yesterday the "bitter medicine" of budget discipline he has implemented and warned against any attempt to turn back the clock.