Berlusconi confirmed on Tuesday that he would stand down after a new budget law is approved in parliament.
"After the approval of this finance law...I will resign, to allow the head of state to open consultations," he told his own Canale 5 television.
Bolstered by unrivalled communication skills and a dominance of Italian media, Berlusconi had for years seemed immune to a series of controversies that would have destroyed a politician in most other parts of the world.
They included the lurid "Rubygate" scandal in which he was charged with having sex with an under-age prostitute, and included a wave of salacious revelations from police wiretaps about alleged orgies at his luxurious Milan villa.
He also faces two ongoing fraud court cases, the latest in more than 30 prosecutions by magistrates he accuses of being communists bent on perverting democracy.
The perma-tanned media tycoon, once a cruise ship crooner, was always unrepentant about a notoriously off-color sense of humour and a series of diplomatic gaffes which have led some foreign leaders to try to avoid being photographed near him.
Berlusconi, 75, one of Italy's richest men, had been in political decline for most of this year, his former mastery undermined by glaring misjudgments in local elections and three referendums as well as the loss of a key alliance.
But he had seemed to have a good chance of hanging on to scheduled elections in 2013, until markets spooked by the Greek crisis turned on Italy, focusing on factors that had existed for years -- stagnant growth and a debt mountain equal to 120 percent of GDP.
As the euro zone debt crisis rapidly accelerated, Italy's government bonds came under increasing pressure and the European Central Bank agreed in August to buy them in return for a tough austerity budget.
His agreement to resign on Tuesday came as Italian bond yields came close to the red line of 7 percent. He had already been forced to accept humiliating IMF monitoring of the reforms--fruit of international skepticism that he could implement them.
Major disagreements within Berlusconi's coalition, especially a refusal to sanction deep pension reform by the Northern League, meant his promises to implement economic reforms in return for ECB bond buying were never followed by action, prompting increasing impatience among fellow euro zone leaders.
Deputies in his PDL party finally decided they had had enough and abandoned him in numbers, fearing their electoral support would be wiped out and seeing him as a liability.
Berlusconi's final demise was a far cry from 2008 when a landslide victory gave the media tycoon his strongest electoral mandate. He had been prime minister for longer than any postwar leader, painting himself as the only choice for the dominant conservative voting bloc and a bastion against communism.
But he did not have long to savor his third election triumph. In 2009 his estranged wife Veronica denounced his sex life and accused him of consorting with under-age women, finally sowing doubts in the minds of voters who had hitherto been charmed by his image as a self-made macho Latin male.
In addition, Berlusconi has persistently shown himself to be better at promises than action, failing to implement pledges in 2008 to use his business acumen to liberalize a notoriously inflexible and protected economy.
Berlusconi's political decline can be dated to last December when he expelled his party's co-founder and former ally Gianfranco Fini. This robbed him of a comfortable parliamentary majority based on Fini's supporters and turned the house speaker into a dangerous enemy.
He has also been undermined by a famously frosty relationship with Economy Minister Giulio Tremonti.
The decline accelerated when Berlusconi suffered a major local election loss in his northern base of Milan in May and defeats in water and nuclear power referendums in June. The defeats were seen as down to his own misjudgement.
He has also shown a dangerously slow appreciation of how his dominance and popularity have declined, continuing to crack inappropriate jokes, making insulting comments in phone calls he must suspect are tapped and underestimating an economic crisis causing real pain.
Berlusconi initially laughed off the economic problems as a figment of the Left's imagination and only a few days ago caused offence by saying Italy was not really in crisis, with the restaurants full and vacation flights fully booked.
Often derided abroad for his facelifts, hair transplants, make-up and diplomatic gaffes, Berlusconi until recently commanded a large following particularly among middle-class women, pensioners and the self-employed, striking a chord with his warnings about the dangers of left-wing extremists.
As owner of Italy's main private television channels and top-flight soccer team AC Milan after making a fortune in a Milan construction boom, he typified an Italian dream, with millions won over by his rags-to-riches story and optimism.
Berlusconi created his own party almost overnight in 1994 to fill the void on the right caused by the destruction of the long-dominant Christian Democrats by a corruption scandal.
His media empire Mediaset has a near-duopoly in television with state-run RAI over which, as premier, he has ultimate control. This gives him a much-criticized stranglehold on Italian media while he is accused of lowering cultural values with variety shows dominated by scantily clad starlets.
Critics say he has used his political and media power to fend off many prosecutions.
If Italians have until now laughed off many of his gaffes, they have caused more offence abroad.
He once caused a minor diplomatic incident by suggesting he had seduced Finnish President Tarja Halonen to persuade her to let Italy host a new EU food safety agency. He called U.S. President Barack Obama "sun-tanned."
Italians are traditionally indulgent of politicians' private lives but Berlusconi's popularity waned as lurid details from leaked wiretaps dominated newspapers, contrasting with his formal espousal of traditional family values.
In the last year the Catholic Church has distanced itself from him, following reports of starlets and prostitutes dancing half-naked for him in return for cash and gifts. He boasted in one phone call of having sex with eight women in one night.
Berlusconi has always maintained the dinners he hosted were jovial affairs that involved little more than food, jokes and song. His only concession has been to say he is "no saint" and loves beautiful women.
(Additional reporting by Deepa Babington; Editing by Angus MacSwan)