Markets Yawn...then drop at Resignation of Italy's Prime Minister Silvio Berlusconi's

By Barry Moody

ROME (Reuters) - Prime Minister Silvio Berlusconi's pledge to resign after implementing economic reforms did nothing on Wednesday to staunch a perilous collapse in market confidence in Italy.

Financial markets have been clamoring for weeks for Berlusconi to depart because of his failure to push through painful austerity measures.

But after Berlusconi's announcement on Tuesday that he would step down, there were few signs of the swift appointment of a government capable of supervising reforms. Berlusconi said he expected an election would not take place until early 2012.

Yields on 10-year Italian debt soared above what is seen as the 'red line' of 7 percent and spreads between Italian government paper and German bunds also rose over another watershed of 500 basis points, reaching a record of above 560.

Analysts said Italy was now in territory where Greece, Ireland and Portugal were forced to seek bailouts.

Berlusconi said he envisaged an election taking place at the start of February, and that PDL party secretary and former justice minister Angelino Alfano would be the center-right's candidate for prime minister.

"I will resign as soon as the (budget) law is passed and, since I believe there is no other majority possible, I see elections being held at the beginning of February and I will not be a candidate in them," he told La Stampa newspaper.

Italy is at the eye of the euro zone debt storm because, as the region's third largest economy, it is viewed as too big to bail out. Its travails therefore pose a threat to the survival of the single currency.