Letta said yesterday he would submit his resignation to President Giorgio Napolitano following his final cabinet meeting after less than a year in power at the head of an uneasy coalition.
The drama in Rome comes after weeks of feuding between Letta and Renzi, the newly-elected ambitious leader of the governing centre-left Democratic Party, which fell behind him in calling for a change in government.
"Mortal Jump", read a headline in the weekly L'Espresso, saying Renzi was "pulling the strings of an operation organised at a table two months ago: it could crown his leadership or reduce his popularity to smoke".
Analysts said Renzi is now tainted with the image of a cloak-and-dagger politician who overthrew Letta -- a leading member of his own party -- despite an earlier agreement to allow him to stay on until 2015.
But they also said he could quickly win support if he manages to push through important reforms, and investors were broadly supportive with stocks and bond rates holding stable on the financial markets.