“We have decided to vote for confidence, not without internal disputes,” Berlusconi said before a confidence vote in parliament, called after he ordered his ministers to leave the cabinet.
Berlusconi said he had changed his mind after hearing Letta’s promise to lower taxes and mindful of the need for reforms, after saying just hours earlier that early elections should be called.
Letta, who had been tipped to win with just a handful of votes minutes before Berlusconi’s U-turn, ended up sweeping the vote with a crushing majority of 235 senators in favour and 70 against.
Letta shook his head as he listened to Berlusconi, who has dominated political life for much of the past two decades but has been on the decline.
As the 77-year-old Berlusconi left the parliament building, some 100 protesters shouted “Go away!”, while his rival Letta flashed a victory sign.
The surprise about-turn made victory for Letta’s coalition a certainty and was cheered by the markets, with shares in Milan jumping 1.45 percent higher although they later closed up 0.68 percent.
The difference between rates on Italian 10-year government bonds and benchmark German ones — a measure of investor confidence — also narrowed to 253 basis points from 260 points on Tuesday.
Giacomo Marramao, a politics professor at Roma Tre university, said the result showed a “decline in credibility” and signalled a split in Berlusconi’s centre-right People of Freedom (PDL) party.
“I think we are seeing the final chapter of Berlusconi’s political life,” Marramao told AFP.
Letta had earlier asked lawmakers to vote for him, saying Italians were tired of pointless wrangling.
“Italians are crying out that they cannot take any more blood in the arena, with politicians who slit each other’s throats and then nothing changes,” said Letta, a 47-year-old moderate leftist.
“Italy runs a risk that could be a fatal risk. Seizing this moment or not depends on us, on a yes or a no,” Letta said in his address to the Senate.
Several key figures from Berlusconi’s PDL broke ranks with the billionaire media mogul after his decision to call time on the government and pull his ministers from the cabinet last Saturday.
Letta immediately condemned the move as “crazy and irresponsible” and Interior Minister Angelino Alfano, national secretary of Berlusconi’s party and his chief protege, reacted by saying he would be “pro-Berlusconi in a different way”.
Roberto Formigoni, a PDL senator who broke ranks, told AFP: “We were not traitors but pioneers!”
“We were pioneers who showed the way forward that the PDL ended up following. We are proud of that because the government had to continue,” he said.
He said he and others would break away in parliament from Berlusconi’s party.
‘Confidence boost for Italy’
A letter doing the rounds in the Senate just before Berlusconi spoke had 23 signatures of PDL senators willing to defy their leader.
A similar document in the Chamber of Deputies lower house had the signatures of 26 PDL lawmakers.
‘Confidence boost for Italy’
Tensions within Italy’s coalition have spiked since Italy’s top court upheld a tax fraud conviction against Berlusconi in August.
These are likely to increase later this month as the Senate moves to expel Berlusconi over his conviction and bar him from the next elections.
A judge is also due to rule on whether Berlusconi should serve his one-year sentence for the fraud as house arrest or community service.
“This was a resounding victory, given how fragile the situation looked over the weekend. Berlusconi overplayed his hand,” said Christian Schulz, a senior economist at Berenberg bank.
“However, the fact that Berlusconi’s PDL did not split for now means that the hardliners will remain in the government, which will not make it easier to agree on policies,” he said.
The country is suffering the longest downturn since World War II and is struggling to meet a public deficit target of 2.9 percent for this year — below the EU-mandated 3.0 percent.
The jobless rate has also returned to a record high of 12.2 percent, with youth unemployment also at its highest ever level of 40.1 percent.