President Sergio Mattarella begins talks with key political leaders on Wednesday to see if a new coalition can be formed, a day after Italy's dysfunctional anti-immigrant government dramatically fell apart with the resignation of Prime Minister Giuseppe Conte. 

If a stable coalition is not possible, Mattarella will consider a short-term technocratic government or a snap election, just 14 months after Conte took the helm of the doomed alliance between the far-right League and anti-establishment Five Star Movement. 

The usually mild-mannered Conte quit after lashing out at Interior Minister Matteo Salvini, who tried to bring down the government to force a snap election amid a surge in popularity for his League party.

"It is irresponsible to initiate a government crisis. It shows personal and party interests," Conte said in his scathing attack on Salvini in the Senate on Tuesday before resigning.

The move left the eurozone's third largest economy in a political vacuum following a year of nationalist, populist government which angered many other European leaders with its demonization of migrants and attempts to flout EU budget rules.

Investors appeared to believe the crisis would be short-lived with the much watched "spread" - the gap between German and Italian bond yields - shrinking, indicating that the markets do not deem significant risk at this stage.

"If they manage to form a new government, it would be welcomed with some caution by other EU leaders who might see it as an opportunity to avoid a showdown over Italy's budget in the next few months," said the director of Future Europe Initiative, Benjamin Haddad.

Italy needs to approve a budget in the next few months or could face an automatic rise in value-added tax that would hit the least well-off Italian families the hardest and likely plunge the country into recession.

Mattarella will begin consultations on a new government at 1400 GMT.

Italy's constitution says Mattarella should first consult former presidents, meaning Senator Giorgio Napolitano, 94, who was in the job from 2006-15.