Italian Prime Minister Matteo Renzi is set to resign on Monday after suffering a crushing defeat in a referendum over constitutional reform, tipping the euro zone's third-largest economy into political turmoil.

Renzi's emotional, midnight resignation announcement sent the euro lower and jolted stock and bond markets on concerns that early elections could follow, possibly paving the way for an anti-euro party, the 5-Star Movement, to come to power. But financial markets bounced back later in the morning as European officials played down the prospect of a broader euro zone crisis.

Italian Economy Minister Pier Carlo Padoan, who has pulled out of scheduled meetings with European finance ministers in Brussels this week, is viewed as a possible candidate to replace Renzi. Senate President Pietro Grasso and Transport Minister Graziano Delrio have also been tipped as possible successors.

The government crisis could open the door to elections next year and to the possibility of the opposition 5-Star Movement gaining power in the heart of the single currency area. 5-Star, which campaigned hard for a 'No' vote, wants to hold a referendum instead on membership of the euro.

"I take full responsibility for the defeat," Renzi said in a televised address to the nation, adding that he would hand in his formal resignation to President Sergio Mattarella on Monday.

"I will greet my successor with a smile and a hug, whoever it might be," he said, struggling to contain his emotions when he thanked his wife and children for their support.

Sunday's referendum was over government plans to reduce the powers of the upper house Senate and regional authorities but was viewed by many people as a chance to register dissatisfaction with Renzi, who has struggled to revive economic growth, and mainstream politics.

Source: Reuters