Story Highlights• Prodi takes action after narrowly losing a foreign policy vote
• Prodi lost support on Afghanistan, expansion of U.S. base
• President will decide on new elections Thursday
• He could skip a vote and appoint new prime minister
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ROME, Italy (CNN) -- Italian Prime Minister Romano Prodi on Wednesday offered his resignation to President Giorgio Napolitano.
The Italian presidential palace said Prodi took the action after losing, by two votes, a major foreign policy vote in the upper house of Parliament.
Prodi's coalition allies rebelled over keeping Italian troops in Afghanistan and allowing the expansion of a U.S. military base in Vicenza, Italy. (Watch what led to Prodi's resignation )
Napolitano reserved the right to decide whether to accept the resignation and has asked the current government to remain in charge as caretaker.
Napolitano is set to begin consultations Thursday with Italian political leaders, after which he will decide whether to call for new elections or give the mandate to a new prime minister or to Prodi himself.
Prodi's term began nine months ago, after he beat Silvio Berlusconi by 20,000 votes. He won with a comfortable margin in the lower house, but only a narrow one in the upper house.
A key issue separating the men was the Iraq war. Berlusconi supported the U.S. invasion, despite overwhelming opposition at home. Prodi vowed to withdraw Italy's nearly 3,000 troops from Iraq by the end of 2006.
But leftists, who last year voted for Prodi, turned out by the thousands Saturday to decry his approval for U.S. plans to expand the military base in the city of Vicenza, home to the 173rd Airborne Brigade.
Another political complication for Prodi is the first criminal trial in the CIA's extraordinary rendition program.
Prosecutors allege that five Italian intelligence officials worked with the Americans -- almost all CIA agents -- to abduct terror suspect Osama Moustafa Hassan Nasr from a Milan street on February 17, 2003.
Nasr was allegedly transferred by vehicle to the Aviano Air Force base near Venice and then by air to the Ramstein Air Base in Germany and on to Egypt, where critics say he was tortured.
Prosecutors say the alleged kidnapping operation was a breach of Italian sovereignty that compromised Italy's own anti-terrorism efforts. They are pressing the Italian government to seek the extradition of the U.S. agents. Berlusconi's government refused, and Prodi's government has yet to make its decision.
Polls show that, if a vote were held today, Berlusconi would eke out a narrow victory. But any new election would not be held for at least three months and, even if he were to win, there is no guarantee he could put together a government coalition.
In recent months, the Christian Democrat Party has distanced itself from Berlusconi's party.
Said one political analyst: "We are in for a long period of political chaos in Italy."
Romano Prodi suffered a major defeat on foreign policy.