ROME (AFP) - Italian Prime Minister Enrico Letta won a confidence vote with a crushing majority after his challenger Silvio Berlusconi abandoned his bid to topple the government in a stunning about-turn.

Out of 305 senators who took part in the vote, 235 were in favour of the government and 70 against with no abstentions - far higher than the majority required of 153 senators.

Earlier on Wednesday, Berlusconi abandoned his bid to topple Mr Letta, saying he would vote to support the government in a humiliating climbdown after key allies rebelled.

"We have decided to vote for confidence, not without internal disputes," Berlusconi said ahead of a confidence vote in Parliament called after he launched his challenge to the leadership on Saturday.

Berlusconi said he had changed his mind on Wednesday after hearing Mr Letta's promise to lower taxes and "the need for a government that can carry out institutional reforms in Italy".

The surprise about-turn made victory for Mr Letta's coalition a certainty and was immediately cheered by the markets, with shares in Milan jumping 1.45 per cent higher after the shock announcement.

The difference between rates on Italian 10-year government bonds and benchmark German ones - a measure of investor confidence - also narrowed to 253 basis points from 260 points on Tuesday.

Mr Letta shook his head as Berlusconi was speaking and the address was followed by stunned silence.

Lawmakers were still set to vote despite the change of heart by a man who has dominated Italian political life for much of the past two decades.