Italian Prime Minister PM Renzi to resign on Friday

Italian Prime Minister Matteo Renzi will hand in his resignation on Friday, a parliamentary source said, as President Sergio Mattarella seeks to slow the pace of an unfolding political crisis.

Renzi vowed to resign in the early hours of Monday after a bruising referendum loss, but Mattarella, whose powers include naming prime ministers and dissolving parliament, asked him to stay on until the 2017 budget passes in a parliamentary vote scheduled for later on Wednesday.

The reason Renzi's resignation was delayed until Friday was unclear, but Mattarella wants parliament to draft a new electoral law before any ballot is held, a source close to the president said on Tuesday, a move likely to push back any vote until spring.

Italy is not due to hold a parliamentary election before 2018 but there is growing consensus among party leaders to hold it a year earlier. Interior Minister Angelino Alfano, head of a small centre-right group, said it should take place in February.

Meanwhile, Italy is still looking for a way to prop up its debt-laden banks, especially struggling Monte dei Paschi di Siena, its third-biggest lender, which may require government involvement.

Two sources told Reuters on Tuesday that the government was preparing to take a 2-billion-euro controlling stake in Monte dei Paschi by purchasing junior bonds.

On Wednesday, a Treasury spokesman denied Italy was poised to ask for a loan from the European Stability Mechanism to support its banking sector.

Later on Wednesday, the top brass in Renzi's Democratic Party will meet to hammer out a strategy. Renzi is still leader of the PD, which has the largest number of parliamentarians, so it is unlikely any new government could be formed without his backing.

The PD plans to support a government of national unity, which would have to include parties currently in opposition, two party sources said on Tuesday. If such a government is not possible, then the PD wants an early election, they said.

Infrastructure Minister Graziano Delrio, a PD member and close ally of Renzi, said on Tuesday the best solution would be for an interim government to be put in place to quickly change the electoral law so an election could be held "in the spring".