Italian President Sergio Mattarella has told Prime Minister Matteo Renzi to put his planned resignation on hold until parliament has approved the 2017 budget, which could be done as early as Friday.
Renzi announced he would resign following his defeat in Sunday's referendum when Italians resoundingly rejected his proposed reforms to the constitution.
After a meeting with Renzi, Mattarella's office said in a statement that the prime minister had told him he could no longer remain in power.
The president told him he should stay in place until the budget was passed to prevent emergency funding rules from kicking in on January 1. Once the budget was passed, he could hand in his resignation, the statement added.
His decision to quit after just two and a half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year.
The euro briefly tumbled overnight to 20-month lows against the dollar, as markets worried that instability could reignite an EU debt crisis and deal a hammer blow to Italy's fragile banking sector, especially the troubled Banca Monte dei Paschi di Siena. However, by early in the European morning it had largely rebounded.
Mr Renzi's resignation could open the door to early elections next year and to the possibility of an anti-euro party, the opposition 5-Star Movement, gaining power in the heart of the single currency. 5-Star campaigned hard for a 'No' vote.
"I take full responsibility for the defeat," Mr 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.
"We are not robots," he said at one point.
"No" won an overwhelming 59.1 percent of the vote, according to the final count.
About 33 million Italians, or more than two-thirds of eligible voters, cast ballots following months of bitter campaigning that pitted Mr Renzi against all major opposition parties, including the anti-establishment 5-Star.
The vote ended months of campaigning for a reform that Mr Renzi had said would bring political stability to Italy - but that opponents said jeopardised democratic checks and balances.
Mr Renzi, 41, took office in 2014 promising to shake up hidebound Italy and presenting himself as an anti-establishment "demolition man" determined to crash through a smothering bureaucracy and reshape creaking institutions.
Sunday's referendum, designed to speed up the legislative process by reducing the powers of the upper house Senate and regional authorities, was to have been his crowning achievement.
However, his reforms so far have made little impact, and the 5-Star Movement has claimed the anti-establishment banner, tapping into a populist mood that has seen Britons vote to leave the European Union and Americans elect Donald Trump president.