UPDATE 2-Italy PM Monti resignation expected on Friday
* Lower House due to approve budget at around 1700 GMT
* President expected to dissolve parliament
* Uncertainty continues over Monti's election plans
ROME, Dec 21 (Reuters) - Italian Prime Minister Mario Monti will hand in his resignation to the president after parliament approves the 2013 budget later on Friday, opening the way to an election expected in February, political and government sources said.
The former European commissioner, appointed to lead an unelected government to save Italy from financial crisis a year ago, has kept his own political plans a closely guarded secret but he has faced growing pressure to seek a second term.
European leaders including German Chancellor Angela Merkel and European Commission President Jose Manuel Barroso have called for his economic reform agenda to continue but Italy's two main parties have said he should stay out of the race.
Ordinary Italians, weary of repeated tax hikes and spending cuts, appear less convinced and opinion polls show little sign that voters are ready to give Monti a second term, with a survey this week showing 61 percent saying he should not stand.
Whether or not Monti runs, he is expected to overshadow an election which will be fought out over the painful measures he has introduced to try to rein in Italy's huge public debt and revive its stagnant economy.
The lower house passed a confidence motion on the budget and is expected to give final approval at around 6 p.m. (1700 GMT), wrapping up its last piece of business before President Georgio Napolitano dissolves parliament and sends Italians to the polls, probably on Feb. 24.
Monti will make a statement to his cabinet at 7 p.m and is expected to tender his resignation to Napolitano immediately afterwards.
The widely anticipated move comes after Monti's technocrat government lost the support of Silvio Berlusconi's centre-right People of Freedom (PDL) party in parliament earlier this month.
Monti is due to hold a news conference on Sunday at which he is expected to outline his intentions. These could include standing as a candidate in the election or endorsing a centrist alliance committed to his reform agenda.
The centre-left Democratic Party (PD) has held a strong lead in the polls for months but a centrist alliance led by Monti could gain enough support in the Senate to force the PD to seek a coalition deal which could help shape the economic agenda.
BERLUSCONI IN WINGS
Senior figures from the alliance, including both the UDC party, which is close to the Catholic Church, and a new group founded by Ferrari chairman Luca di Montezemolo have been hoping to gain Monti's backing.
He has not said clearly whether he intends to run, but he has dropped heavy hints that he will continue to push a reform agenda that has the backing of both Italy's business community and its European partners.
The PD has promised to stick to the deficit reduction targets Monti has agreed with the European Union and says it will maintain the broad course he has set while putting more emphasis on reviving growth.
Berlusconi's return to the political front line has however added to the already considerable uncertainty about the centre-right's intentions and increased the likelihood of a messy and potentially bitter election campaign.
The billionaire tycoon has fluctuated between attacking the government's "Germano-centric" austerity policies and promising to stand aside if Monti will agree to lead the centre right, but now appears to have settled on an anti-Monti line.
He has pledged to cut taxes and scrap the hated IMU housing tax which Monti imposed. He has also sounded a stridently anti-German line which has at times echoed the tone of the populist 5-Star Movement headed by maverick comic Beppe Grillo.
Both the PD and the PDL, both of which supported Monti's technocrat government in parliament, have made it clear they would not be happy if he ran against them and there have been foretastes of the kind of attacks he can expect.
Former centre-left prime minister Massimo D'Alema said in an interview last week that it would be "morally questionable" for Monti to run against the PD, which backed all of his reforms and which has pledged to maintain his pledges to European partners.
Berlusconi who has mounted an intensive media campaign in the past few days, echoed that criticism this week, saying Monti risked losing the credibility he has won over the past year and becoming a "little political figure".