The largest party in Italy's ruling centre-left coalition - the Democrats of the Left - is moving towards a merger with a centre party, Margherita.
The Margherita leader is working with Mr Prodi (right) on the merger
Prime Minister Romano Prodi is pushing for the merger, in a plan to simplify Italian politics and stabilise the disparate centre-left alliance.
Mr Prodi told a congress of Margherita ("Daisy") that he would quit politics at the end of his current term in 2011.
He said the new party should strive for "a new democratic phase in Italy".
The Margherita congress in Rome is being held at the same time as a Democrats of the Left (DS) congress in Florence.
DS leader Piero Fassino said the planned merger was "a historic imperative".
For decades, the Communists dominated left-wing Italian politics, but the new left-wing leadership has been trying to scrap the stereotype Cold War images, the BBC's David Willey reports from Rome.
Mr Berlusconi leads the conservative opposition
First they jettisoned the name "Communist", then they removed the hammer and sickle as the party symbol, replacing it with an olive tree.
Now they are considering dropping the words "of the left", renaming the party simply "The Democratic Party".
Despite the support of Mr Prodi, who belongs to no political party, there is already dissent on the far left fringes.
It is by no means certain that the Democrats' desire to create what one delegate describes as an Italian version of the British Labour Party will succeed, David Willey says.
The former prime minister and now opposition leader Silvio Berlusconi sat in the front row at the DS congress on Thursday, applauding occasionally.
He told delegates that if the new Democrat Party did go ahead, he would try to create a similar wide-ranging new formation on the political right.
Our correspondent says both left and right are deeply dissatisfied with the extreme fragmentation of Italian politics and feel that governments would become more stable if voters had to choose between just one big party of the centre-left or another of the centre-right.