Letizia Moratti, candidate of Berlusconi's People of Freedom party, was 4 to 5 points behind leftist Giuliano Pisapia of the Democratic Party, ANSA reported.
Pisapia was not expected to win a majority and secure victory in the first round, however, and a runoff is likely.
The Northern League, Berlusconi's ally, was doing well and was likely to demand more Cabinet posts and accelerated regional autonomy, said James Walston of the American University in Rome.
Before the vote, political economist Franco Pavoncello declared a loss in Milan "would be a catastrophe" for Berlusconi and "bring down the government."
Almost a quarter of the Italian population was eligible to vote in local elections Sunday and Monday, the first political test since Berlusconi was charged in four criminal cases and the last before general elections scheduled for 2013.
The leftist Democrats, including former Communists, seemed to be holding Turin and Bologna but losing Naples.
Turnout dropped 2 to 3 percentage points from the last local elections.