* Monti says failing to pass budget will worsen crisis
* Monti says his resignation will be "irrevocable"
* PD leader Bersani lauds Monti's move
* Berlusconi earlier said would run in election next year
* Berlusconi resigned in 2011 amid economic crisis, sex-scandal
Italian Prime Minister Mario Monti announced on Saturday that he intended to resign once next year's budget is approved in parliament after Silvio Berlusconi's party withdrew its support for his technocrat government this week.
Only hours before the announcement, Berlusconi said he would run to become premier for a fifth time on a platform that attacks Monti's stewardship of the economy.
President Giorgio Napolitano is now expected to set the date for an election which must come within 70 days of the government resigning. Italy had in any case been due to go to the polls by April at the latest.
Monti's move turns the tables on Berlusconi, who seemed to have once again seized a political opportunity to keep his party in the political game just a year after being forced to resign amid a sex scandal and a debt crisis.
At a conference in France earlier, Monti, whose year in office was widely credited with restoring Italy's international credibility after the scandal-plagued Berlusconi era, warned of the threat of "populism". He said Italy should not go back to where it was when he took over for Berlusconi a year ago.
When he returned to Rome, he met Napolitano for two hours before announcing his intentions.
He warned that not approving the budget "would render more serious the government crisis, also at a European level," and said that after it is approved, his resignation would be "irrevocable".
Leaders of both Berlusconi's centre-right People of Freedom (PDL) party and the centre-left Democratic Party (PD), which is leading in the opinion polls, said they would pass the budget.
"Faced with the irresponsibility of the right that betrayed a commitment it made a year ago before the whole country... Monti responded with an act of dignity that we profoundly respect," said PD leader Pier Luigi Bersani.
"We are ready to approve the budget in the fastest possible manner," he said in a statement.
Italians will vote in the middle of a severe economic crisis, with a recession that began mid-way through last year showing no signs of abating and unemployment at 11.1 percent, a record high.
With the support of a cross party alliance including both the PD and the PDL, Monti imposed austerity measures to bring borrowing costs under control, but Berlusconi said on Wednesday that the economic professor's policies had left Italy facing a "recessive spiral without end".
The PDL withdrew parliamentary support for Monti on Thursday, but stopped short of voting against it, raising the spectre of a snap election and driving up the difference between German and Italian benchmark bonds by about 30 basis points.
Berlusconi's centre-right PDL lags the PD by at least 16 percentage points in opinion polls, and also trails the anti-establishment 5-Star Movement, which has surged to prominence on a tide of public anger against the mainstream political class.
Monti's move will fuel speculation over whether he intends to run to lead the country next year once he has resigned. So far he has said he will step in only if the election result is unclear, but there has been growing speculation he could join forces with a centrist group.
Financial markets have been closely watching the political upheaval in Italy and many in the business establishment have hoped for a second term from Monti.
However Berlusconi, Italy's most proved election campaigner, said that he would not give in easily.
"I race to win," Berlusconi told reporters at the practice field for AC Milan, the soccer club he controls, after repeating criticism of Monti's handling of the economy over the past year.
"To win, everyone said there had to be a tested leader. It's not that we did not look for one. We did, and how! But there isn't one... I'm doing it out of a sense of responsibility."