Italy has moved a step closer to resolving its pensions crisis, which has been a key political issue.
The pension problem is a key challenge for Mr Prodi
Prime Minister Romano Prodi has agreed with Italy's unions to raise the country's retirement age to 58 in 2008 from its current level of 57.
The deal waters down a measure passed under the previous government, which would have seen the pension age increase to 60 by next year.
Italy is struggling to get its finances in order amid huge national debts.
The agreed plan followed a marathon session of talks overnight and was later backed by Mr Prodi's cabinet.
The deal gives a massive boost to his credibility in placating the reformist and radical elements of his fractious ruling centre-left coalition, as well as the country's powerful unions, analysts say.
The measures, which could gradually raise the minimum pensionable age to 60 by 2013 for those who have worked for 35 years, will now be put to parliament for a vote.
Analysts believe that with the cabinet's support, they should be narrowly pushed through.
Italy has the oldest population in Europe and one of the lowest birth-rates.
As a result, pension reform has been seen as key in reducing the country's debt levels, which are currently the highest in the European Union.
The Bank of Italy has said that the percentage of people over 60 compared with the working population could rise to 53% in 2020 and 83% in 2040, from 42% in 2005.
The savings from a higher retirement age - expected to cost about 10bn euros over 10 years - would also help to meet EU rules on Italy's budget deficit, which it must erase by 2010.
The former conservative government led by Silvio Berlusconi had bulldozed through much stricter proposals for reform, including raising the retirement age to 60 by next year and then 62 by 2014.
But after a furious backlash from the unions, Mr Prodi's coalition had been keen to reach a compromise plan.
Italy's deteriorating public finances have recently prompted ratings agencies Standard & Poor's and Fitch to downgrade its debt.