European markets have opened lower, with the inconclusive election result in Italy raising fears that political deadlock will delay economic reforms.
Italy’s FTSE MIB index fell 4.7%, while London’s FTSE 100 shed 1.5% and share markets in Frankfurt and Paris also fell more than 2% at the start.
The yield on Italian government bonds also rose sharply, implying markets are more wary of lending to Italy.
Earlier, stock markets in Asia had closed lower.
Japan’s main Nikkei 225 stock index lost 2.2%, Hong Kong’s Hang Seng fell 0.8% and Australia’s ASX was down 1%.
Oil prices also dropped, hit by worries that uncertainty in the eurozone could hit demand, with Brent crude falling 87 cents to $113.57 a barrel.
With all domestic votes counted in Italy’s parliamentary election, the centre-left bloc won the lower house by a tiny margin, but did not secure a majority in the Senate.
Fears are that a split parliament will make it harder for one group to push through their plans to revive the economy, and that may stall Italy’s process of cutting its public debt levels.
Banks were the biggest fallers on the stock markets, with shares in major banks across Europe down more than 4%.
The yield on Italian 10-year government bonds rose to 4.77% from 4.48%, and the gap between the yield on Italian and German 10-year bonds widened.
European markets have opened lower, with the inconclusive election result in Italy raising fears that political deadlock will delay economic reforms
Former Prime Minister Silvio Berlusconi, who has conceded the lower house to Pier Luigi Bersani’s centre-left bloc, played down the significance of the spread, and said he was not worried about market reaction to the vote.
But Spanish Foreign Minister Jose Manuel Garcia-Margallo said there was “extreme concern” over possible movements in bond spreads as a reaction to the results.
“This is a jump to nowhere that does not bode well either for Italy or for Europe,” he said.
Giuseppe Fontana, professor of monetary economics at Leeds University Business School, said Italian voters had sent a “chilling message” to the markets and policy makers.
Georg Grodzki, head of credit research at Legal & General Investment Management, said the Italian result would leave markets guessing for a while.
“Uncertainty is not good for confidence. It’s not bad enough for an immediate abrupt sell-off but it could well build over the next few months into some crisis,” he said.
With political instability likely to continue at least in the near term, Angus Campbell from Capital Spreads said: “The uncertainty that this causes is enough to make anyone nervous and we are likely to see an interim administration for a number of months before fresh elections, unless a working coalition can be formed.”
For more than a year Italy was led by technocrat Mario Monti, appointed after Silvio Berlusconi’s resignation in November 2011 amid an acute debt crisis.
He was tasked with reforming the economy, and introduced unpopular economic austerity measures, implementing spending cuts and tax rises.
Mario Monti resigned in December after Mr Berlusconi’s conservative party withdrew its support from his government. Although he ran in the latest election, his bloc won only 10% of the vote, with the majority of voters rejecting austerity.
Ishaq Siddiqi, market strategist at ETX Capital, warned of future turmoil in Italy.
“What is more worrying for investors is that the political deadlock in Italy would suggest that even if we do see a market-friendly scenario materialize with a reform-minded government taking control, the fact that Berlusconi managed to gain such an influence with his anti-austerity campaign means that we are likely to see a rise in civil unrest in Italy.”
Investors are now looking towards a testimony later on Tuesday from US Federal Reserve chairman Ben Bernanke.
Global markets were shaken last week by an indication from the Fed that it might scale back its strong monetary stimulus sooner than expected.
Italy’s parliamentary elections have ended in stalemate and the possibility of a hung parliament.
With all domestic votes counted, Pier Luigi Bersani’s centre-left bloc has narrowly beaten ex-PM Silvio Berlusconi in the lower house but has failed to secure a majority in the Senate.
Control of both houses is needed to govern and a Berlusconi official said the election was “too close to call”.
A protest movement led by comedian Beppe Grillo won a quarter of the vote.
Meanwhile a bloc led by current Prime Minister Mario Monti came a poor fourth, with about 10%.
The outcome of the election, which comes amid a deep recession and tough austerity measures, was so close that the margin of victory given in interior ministry figures was less than 1% in both houses of parliament.
“It is clear to everyone that a very delicate situation is emerging for the country,” said centre-left leader Pier Luigi Bersani as the last of the votes were being counted.
Angelino Alfano, secretary of former PM Silvio Berlusconi’s People of Freedom party, said the result was “extraordinary”, and he urged the interior ministry to wait before declaring a final result.
The interior ministry figures were not official, he argued, and were “inevitably subject to a margin of error”.
With returns from all polling stations processed, the interior ministry figures gave Pier Luigi Bersani’s centre-left bloc 29.54% of the vote for the lower house (Chamber of Deputies), barely ahead of the 29.18% polled by Silvio Berlusconi’s bloc.
Angelino Alfano said the result was “too close to call” given the tight margin between the two blocs.
Votes cast outside Italy are still to be collected.
Pier Luigi Bersani also won the national vote for the Senate, but was unable to secure the 158 seats required for a majority.
As bonus seats are distributed in the upper house according to regional votes, Silvio Berlusconi’s centre-right bloc was expected to emerge with a higher number of seats.
Italy’s parliamentary elections have ended in stalemate and the possibility of a hung parliament
Silvio Berlusconi was heading for victory in three of the four big regions – Lombardy in the north, Campania in the centre, and Sicily in the south.
Initial exit polls on Monday afternoon gave Pier Luigi Bersani’s bloc a clear victory, prompting the Milan stock market to soar by nearly 4%.
But as the close result became clear the markets fell back. In New York, the Dow Jones Industrial Average fell 1.55% and Asian markets lost between 0.7% and 2.2%.
The apparent split between left and right in the eurozone’s third largest economy is likely to cause great anxiety among leaders in other EU member states.
A period of horse-trading will now follow, and the leading blocs will try in turn to form a coalition.
But, with the electorate apparently so divided, many believe a second election will have to follow in a few months.
Silvio Berlusconi, 76, left office in November 2011, facing claims of economic mismanagement as the eurozone struggled to contain Italy’s debt crisis.
Italians have had more than a year of technocratic government under Mario Monti. But his attempts to reduce spending caused widespread public resentment and his decision to head a centrist list in the parliamentary elections attracted little more than 10% of the vote.
“Some supposed we’d get a slightly better result but I am very satisfied, we are very satisfied,” he said.
In a surge in support, Beppe Grillo’s anti-austerity Five Star Movement attracted 25.54% of the vote.
Correspondents say this was an extraordinary success for the Genoese comic, whose tours around the country throughout the election campaign – hurling insults against a discredited political class – resulted in his party performing well in both chambers.
“We’ve started a war of generations,” Beppe Grillo said in an audio statement on his website which taunted the leaders of the mainstream parties.
“They are all losers, they’ve been there for 25 to 30 years and they’ve led this country to catastrophe.”
As the extent of his success became clear on Monday night, Beppe Grillo’s supporters in his home town of Genoa celebrated early into Tuesday morning.