Romano Prodi’s government has collapsed after he lost a vote of confidence in the Italian Senate last week.
The Roman Catholic Udeur party’s withdrawl of support was key to the defeat.
It is likely that elections will have to be held less than two years after a coalition of nine parties took office.
Former Prime Minister Silvio Berlusconi is leading in opinion polls.
The country’s President is considering a range of options such as asking Mr Prodi to try to form a new coalition or approaching a figure such as the Senate speaker to head an interim administration.
Key issues around electoral reform and a proposed referendum on the current electoral law may need to be resolved before Italians go to the polls again.
The crisis began earlier this month when Christian Democrat leader Clemente Mastella resigned as Justice minister after his wife was embroiled in a corruption scandal.
He complained that his coalition partners had been insufficiently supportive and that the corruption investigation is retaliation for his attempts to reform the judiciary.
The nature of the Italian political system means that since 1945 the country has mostly been ruled by fragile coalitions, and the group of parties that finally removed Silvio Berlusconi from office in April 2006 were no different.
Mr Prodi’s commitment to increased gay rights caused tension in the coalition, which ranged from Communists to Roman Catholic parties.
Proposals from ministers to bring forward a draft bill that would grant any unwed couple, gay or straight, the right to register themselves as a family stalled.
The proposed new law would also grant some pension and health insurance rights, but falls far short of the civil partnerships gay and lesbians in the UK enjoy.
Italy is perhaps the only country in Europe where the Roman Catholic Church retains such strong influence over politics.
Church-state relations remain frosty following Pope Benedict XVI’s repeated attacks on the proposed legislation to recognise gay couples.
Leftist members of the government, however, are determined to advance gay rights – if the coalition can be held together.
However, if new elections bring Mr Berlusconi and his allies back into office the gay rights agenda is likely to be abandoned completely.
“The problem for the centre left is that it comes out of this test reduced to shreds,” said an editorial in Corriere della Sera newspaper.
“It does not exist anymore, and the score-settling has not even started yet.”