Italy: Market Jitters Over Risk Of Gridlock
US stocks had their worst drop in more than three months as early results in Italy's election raised the prospect of political paralysis.
The Dow Jones industrial average fell 216.40 points, or 1.6%, to 13,784.17, its biggest drop since November 7.
Two days of polling in Italy ended with uncertainty as early returns suggested a parliament split between the two mainstream blocs, the centre-left led by Pier Luigi Bersani and the conservatives of Silvio Berlusconi.
A protest movement led by comedian-turned-political agitator Beppe Grillo has surged in the vote, gaining as much as a quarter of the electorate.
The Standard & Poor's 500 index fell 27.75 points, or 1.8%, to 1,487.85, dropping below 1,500 for the first time in three weeks.
The Nasdaq composite dropped 45.57 points, or 1.4%, to 3,116.25.
Italy's stock market made early gains when exit polls suggested that Mr Bersani, who heads the Democratic Party, might command a majority in both houses of parliament.
But those gains evaporated when early vote count suggested that Mr Berlusconi might claim the Senate.
The markets supported Mr Bersani because his bloc was seen in favour of economic reforms in the eurozone's third-largest economy, possibly with the backing of Mario Monti, the outgoing prime minister who has imposed tough austerity measures.
The surge of Mr Grillo's anti-austerity Five-Star Movement adds to the uncertainty and further raises the prospect of political instability.
"There was confidence in this election and obviously confidence imploded," said Ben Schwartz, a market strategist at Lightspeed Financial.
Investors dumped Italian government bonds, sending their yields higher, and erased most of the early rally in Italy's stock market.
The yield on Italy's 10-year government bond shot up to 4.43% from 4.12% early in the day, a sign that investors' confidence in Italy's government was dimming quickly.
The country's benchmark stock index, the FSTE MIB, rose 0.7%, giving up an early gain of 4%.
Investors worry the outcome of Italy's election could re-ignite Europe's debt crisis.
ETX Capital's head of trading Joe Rundle explained the sharp rise ahead of the gain being stripped out.
He said: "Traders switched on the buy signal, snapping up peripheral stocks ... while the Eurostoxx 50 index is also basking at the prospects of Italy not going down a road of destabilisation with Berlusconi's anti-reform policy.
"Markets were hopeful that there will be no real change to the status-quo in Italy and demonstrated this by today's positive price-action but this early exit poll has almost cemented it."
A fund manager at a large Milan investment house added: "The market didn't want Berlusconi back in the driving seat."
Polls closed at 2pm UK time, ending two days of voting. The first projections, based on partial vote counts, are expected at around 7pm UK time.