European stocks slump on Italy vote deadlock

European stock markets slumped and the euro hit a near two-month dollar low on Tuesday as dealers assessed the fallout of Italy's political impasse after elections in the indebted eurozone country.

Milan's FTSE MIB index tumbled 4.89 percent to end the day at 16,552 points, with deadlock in Italy's parliament after a critical vote in which the real winner was a protest party calling for a referendum on the euro.

London's FTSE 100 index of leading companies fell 1.34 percent to 6,270.44 points, Frankfurt's DAX 30 shed 2.27 percent to 7,597.11 points, in Paris the CAC 40 shed 2.67 percent to 3,621.92 points, as shares in European banks tumbled.

Madrid's IBEX 35 index dived 3.2 percent to 7,980.7 points on fresh fears of eurozone instability, traders said.

"Share markets and bank stocks in Europe are sliding as investor sentiment is rattled by the political impasse in the Italian elections," said Ishaq Siddiqi, market strategist at ETX Capital trading group.

In foreign exchange deals, the euro hit an intra-day trough of $1.3018 -- the lowest point since January 7 -- before recovering to $1.3059. That compared to $1.3065 late on Monday.

The price of gold, often seen as a haven in times of economic unrest, grew to $1,590.50 an ounce from $1,586.25 late on Monday in New York.

"Political uncertainty has increased in Italy following the election results, weighing upon the euro and risk assets," said Lee Hardman, currency analyst at the Bank of Tokyo-Mitsubishi UFJ in London.

"The election results send a strong signal for change from the electorate who have voted against the traditional political establishment, and the fiscal austerity programme endorsed by Europe.

"A period of prolonged political uncertainty in Italy poses downside risks for the euro in the near-term although unstable politics in Italy is not exactly a new phenomenon which with time the market may become more comfortable with as the ECB is still standing behind the debt market," Hardman added.

Elsewhere on Tuesday, Italy's borrowing rates jumped in a short-term bond auction.

The rate for the sale of six-month paper that raised 8.75 billion euros ($11.46 billion) shot up to 1.237 percent compared to 0.731 percent for the last similar auction in January.

On the secondary market the yield on benchmark Italian government 10-year bonds jumped to 4.897 percent -- the highest rate in three months -- from 4.490 percent on Monday as investors demanded better returns to risk holding Italian debt.

Ben May at London-based Capital Economics said "we think political uncertainty is likely to prompt them to continue to climb higher and that it may eventually force Italy to request a support package from the eurozone."

The yield on 10-year Spanish government bonds also rose sharply, to 5.365 percent from 5.168 percent on Monday, after having shot up as high as 5.6 percent at one point during the trading session.

-- 'We are likely to see increased volatility in the weeks ahead' --

Italy was at an impasse Tuesday after an election seen as crucial for the eurozone failed to produce a clear winner and provided a shock debut for a populist anti-austerity party.

Centre-left Democratic Party leader Pier Luigi Bersani scraped a razor-thin victory in the lower house of parliament but there was no winner in the Senate in the eurozone's third biggest economy.

A majority in both chambers of parliament is required to form a government, leaving Italy in a state of limbo with a hung parliament that is unprecedented in its post-war history.

"With the Italian elections delivering the worst possible outcome for investors, equity markets have reacted swiftly and severely -- giving up yesterday's gains and more," Rebecca O'Keeffe, head of investment at Interactive Investor, said in a note to clients.

"The risks in Europe remain significant and we are likely to see increased volatility in the weeks ahead," she added.

Financial stocks pushed indices lower, with Italy's biggest bank Unicredit tumbling 8.46 percent to 3.83 euros, France's Societe Generale losing 5.45 percent to 28.2 euros, Deutsche Bank shedding 4.88 percent to 34.42 euros and Barclays in non-eurozone member Britain giving up 4.7 percent to 297 pence.

In Asia equities fell with dealers there also spooked by the deadlocked Italian vote.

Tokyo tumbled 2.26 percent, with profit-takers moving in after the index enjoyed a big surge on Monday.

Sydney shed 1.03 percent, Seoul lost 0.47 percent, Shanghai tumbled 1.40 percent, while Hong Kong fell 1.32 percent.

US stocks, which had tumbled on Monday over Italian election concerns, generally moved higher Tuesday as Federal Reserve Chairman Ben Bernanke reaffirmed the need for continued economic stimulus in testimony to Congress.

The Dow Jones Industrial Average was up 0.55 percent to 13,860.05 points in midday trading.

The broad-based S&P 500 added 0.13 percent to 1,489.77, while the tech-rich Nasdaq Composite Index slid 0.16 percent to 3,111.16 points.

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