Italian election impasse roils world markets, shakes Europe

World markets were rattled and alarm bells were set off across Europe yesterday after the Italian election ended at an impasse, failing to produce a clear winner and providing a shock debut for a populist anti-austerity party.

The Milan stock market plunged and Italy's borrowing rates jumped after centre-left Democratic Party leader Pier Luigi Bersani scraped a razor-thin victory in the lower house of parliament but the Senate remained up for grabs.

Stock markets in Europe, Asia and America also fell on fears of instability in the euro zone's third biggest economy.

European capitals, which fear the deadlock could plunge Italy back into the debt crisis storm, sounded alarm.

"It's a leap into the unknown, which bodes poorly both for Italy and the rest of Europe," said Spanish Foreign Minister Jose Manuel Garcia-Margallo.

Silvio Berlusconi's right-wing forces came a close second, winning 29.18 per cent of the vote to 29.54 per cent for Bersani in the lower house. A third force - the populist, anti-government Five Star Movement (M5S) of former comic Beppe Grillo - won 25.5 per cent.

The big loser was outgoing prime minister Mario Monti, who won just 10.56 per cent.

But in the 315-seat Senate, neither left nor right has mustered a majority, with Berlusconi's People of Freedom winning 116 seats and Bersani's Democratic Party winning 113. Some Democratic Party officials suggested fresh elections may have to be held within a few months after a reform of Italy's complex electoral laws.

Political analysts suggested a possible return to the grand coalition agreement - or even dissolving the Senate alone to hold fresh elections. But Berlusconi dismissed the idea of fresh polls, saying that would not be useful.