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Italy's government, led by Prime Minister Romano Prodi, abandoned by its erstwhile Marxist allies over a belt-tightening budget for 1998, resigned Thursday after 17 months in office but was to stay on as caretakers.

President Oscar Luigi Scalfaro accepted Prodi's offer to resign "with reserve," a traditional form of words used to ask the government to remain in a caretaker capacity.

Prodi, who headed Italy's first administration led by the left since World War II, pre-empted certain defeat for his government in a scheduled vote in the lower house Chamber of Deputies by offering to quit.

Prodi's government depended on the hard-line Communist Refoundation Party in the lower house to pass legislation. But the party refused to back the deficit-cutting 1998 budget because of cuts of $2.9 billion in pensions and welfare spending.

Stocks and bonds fell, but closed above the day's lows as investors clung to hopes that the crisis would be resolved without resorting to a worst-case scenario of early elections.

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