Political uncertainty in Italy slammed markets hard Tuesday with investors fearful that Europe's debt crisis may be about to rear its head again.

The election has proven so close that final official results are not expected until later Tuesday, at the earliest. But already, the prospect of a political impasse has raised the possibility of another election down the line.

Though the centre-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament, the Senate looks split with no party in control. The results are seen as a clear rebuff to the austerity approach that was the mainstay of the previous technocratic government led by Mario Monti.

"Clearly markets are taking fright from the messy and chaotic Italian election result," said Louise Cooper, financial analyst at CooperCity.

In Europe Italy's FTSE MIB index was the worst-performing index, with some of the banking stocks suspended for a brief period after precipitous falls at the bell. The index was trading 4.4 per cent at 15,635, having earlier been nearly 5 per cent down.


Workers open the ballots in a polling station in downtown Rome on Monday during Italy's general elections. Italians fed up with austerity voted in the country's most important election in a generation, as Europe held its breath for signs of fresh instability in the eurozone's third economy. (Filippo Monteforte/AFP/Getty Images)

The interest rate on the country's benchmark 10-year bond — an important gauge of investor sentiment — ratcheted up 0.30 percentage point to 4.74 per cent. Meanwhile, investors sought protection in the bonds of more stable and prosperous economies. The interest rate on Germany's 10-year bonds fell 0.10 percentage points to 1.47 per cent.

Silvio Berlusconi, the former Italian premier whose centre-right coalition defied expectations and has seemingly prevented the centre-left from winning, insisted a government can be formed and called on Italians to ignore the "crazy markets."

Despite Berlusconi's attempt to reassure, other stock indexes in Europe were trading sharply lower too — though above the lows they hit in the first hour of trading. Germany's DAX was down 1.9 per cent down at 7,624 while the CAC-40 in France fell 2.3 per cent to 3,634. The FTSE 100 index of leading British shares was 1.3 per cent lower at 6,271.

Italy is hugely important for the future of the euro and its apparent stability over the past six months has been one of the reasons why concerns over the currency have eased. Of the 17 European Union countries that use the euro, it has the second-highest debt burden as a proportion of its annual gross domestic product at 127 per cent. Only Greece's is higher. Italy has to spend around €80 billion just to service its debt each year.

The Monti government of enacted wide-ranging reforms to the budget and the economy — to the widespread relief of markets. Though its borrowing rates have fallen in financial markets, the cost to Italians has been high, with the country mired in an 18-month recession and unemployment on the up. Monti was a big loser in the election.

The worry across Europe, and financial markets as a whole, is that the appetite for reform may wane and Italy's debt situation may deteriorate.

Though its annual borrowing — its budget deficit — is pretty small compared with other euro countries at 3 per cent of its annual gross domestic product, its overall debt stands at a colossal €2 trillion.

Last July, concerns over the country's ability to pay down its debt — despite the Monti reforms — and the stability of the wider eurozone sent the interest rate on its 10-year bonds back up to 6.36 per cent. This prompted the European Central Bank chief Mario Draghi to offer to buy up unlimited quantities of short-term debt in countries struggling with high borrowing costs.

Comic-turned candidate changes election dynamic

The surprise factor in Sunday and Monday's election was the number of votes for comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalized on a wave of voter disgust with the ruling political class.

"The election results send a strong signal for change from the electorate who have voted against the traditional political establishment, and the fiscal austerity program endorsed by Europe," said Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ.

The euro was also hit hard late Monday on the initial fallout of the election results, nearly falling to below $1.30 US for the first time since early 2013. However, it recovered its poise Tuesday, trading 0.1 per cent higher at $1.3087.

Wall Street was poised for a steady opening, a day after the main U.S. indexes had their worst day since last November. Dow futures and the broader S&P 500 futures rose 0.2 per cent.

Earlier in Asia, standout losses were recorded by Japan's Nikkei, which slid 2.3 per cent to 11,398.81 as the yen appreciated to the potential detriment of the country's exporters. The dollar was 0.4 per cent lower at $92.23 yen.

Elsewhere in Asia, Hong Kong's Hang Seng dropped 1.3 per cent to 22,519.69 while South Korea's Kospi fell 0.5 per cent to 2,000.01.

Oil prices took a hit too, with the benchmark New York rate 64 cents lower at $92.47 a barrel.