Italy might need early elections to overcome a political impasse, after President Sergio Mattarella rejected Prime Minister Mario Draghi’s dramatic resignation in the wake of a mutiny by a coalition partner.

Mattarella refused Draghi's attempt to quit on Thursday evening, instead asking him to address parliament next week to get a clearer picture of the political situation.

If unity cannot return swiftly to government ranks, the only alternative would be for an election to be called in the autumn, Foreign Minister Luigi Di Maio said, warning that an early vote would be welcomed by Russia, but would damage Italy's economy.

"If Draghi falls, we vote," he told RTL radio, adding that without a fully functioning government in the coming months, Italy would risk losing billions of euros in European Union post-pandemic recovery funds and not be able to enact measures to combat the high energy costs.

"An early election ... is a problem for the country," said Di Maio.

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Draghi's 18-month-old government was thrown into turmoil by the populist 5-Star Movement, which boycotted a parliamentary confidence motion on Thursday on Draghi's plans to tackle the growing cost of living, arguing they did not go far enough.

Critics say the party, which was torn apart by a schism last month, was acting merely out of self interest, anxious to raise its profile with voters following a slump in the opinion polls.

The risks of political chaos has unnerved financial markets with the premium Italy pays over German debt rising to a one-month high on Friday. 

Election worries

A national election is due in the first half of 2023 and bringing the vote forward would give parties little time to draw up manifestos and prepare their lists of candidates.

However, a source in the prime minister's office, who declined to be named, expressed pessimism over the prospects of reviving the coalition and said the most likely outcome was a vote in early October.

In that case Draghi could stay on in a caretaker capacity, but would not be able to draw up budget for 2023 or enact reforms demanded by Europe in return for the recovery funds.

Draghi, a widely respected former chief of the European Central Bank, has played a prominent role in the EU's response to Russia's invasion of Ukraine, helping draw up economic sanctions on Moscow and sending weapons to Kyiv.

The 5-Star is likely to come under heavy pressure from other coalition partners to back down in its confrontation with Draghi and allow his administration to see out the legislature.