Italy risks political impasse in cliffhanger election

Italy was headed for an impasse on Monday with the left barely ahead in the lower house but behind in the upper house in elections being watched around Europe in which the real winner might be a new protest party calling for a referendum on the euro.

Democratic Party leader Pier Luigi Bersani and his leftist coalition were shown less than one percentage point ahead in incomplete results from voting for the lower house, the Chamber of Deputies.

But in the Senate, projections based on early results showed Berlusconi's centre-right could win the most seats, although no overall majority.

Even if he allies with outgoing prime minister Mario Monti as has been mooted, Bersani under these projections would also fall short of a majority.

"If there is one majority in the Chamber and another in the Senate, there is no government," said Stefano Fassina, a top Democratic Party official.

European capitals and the financial markets have been worried that no clear winner will emerge, bringing fresh instability to the eurozone's third largest economy after Germany and France.

"A stalemate between the two houses of parliament would add a noisy element of instability to the political mix," Berenberg bank analysts said in a note to investors.

Italy has been plagued by a chronically unstable political landscape for decades, and there have been fears too of a return to lax public finances.

Democratic Party officials suggested fresh elections may have to be held within a few months after a reform of Italy's complex electoral laws, although they cautioned to wait for final results.

"This is a shock vote that gives us a blocked parliament," ran a headline on the website of Italy's top-selling daily, Corriere della Sera.

Massimo Razzi, columnist for La Repubblica daily, said the elections had made Italy "ungovernable".

Analysts warn an alliance between Bersani and Monti -- even if it could form a majority -- may be unsteady because of differences between the pr-market Monti and radical leftists with Bersani.

The newcomer Five Star Movement led by former comedian turned activist Beppe Grillo, who has stirred anger at politicians and budget cuts, looked set to be the real winner of the vote, bringing in dozens of lawmakers to parliament.

"This is fantastic! We will be an extraordinary force," Grillo said in a phone interview on his movement's website, warning mainstream politicians they would "only last a few more months."

"We'll have 110 people in parliament and we'll be millions outside," said the campaigner, who has packed city squares across Italy with his rallies.

Grillo's movement has drwn supporters with a mix of anti-corruption initiatives, environmental causes and campaigning on grassroots local issues.

In contrast to Grillo's shock success, the outgoing Monti was given just 10 percent in exit polls.

Monti has won praise in Europe but has been increasingly criticised at home for his austerity.

The premier said he was "satisfied" with the results and called on any future government "not to dissipate the sacrifices made by Italians."

"A government must be guaranteed for the country," he said.

Angelino Alfano, national secretary of Berlusconi's People of Freedom party, said the result was "extraordinary".

"We are very happy, very satisfied," he said.

"I think these elections show that people who thought... Silvio Berlusconi was finished should think again," he said.

Investors hailed the first signs that the left had won handily, with stocks in Milan jumping by more than 3.5 percent after the exit polls.

The rally slowed however and stocks went into negative territory after it became clear that the race might be too close to call in the Senate.

Stocks finally closed up just 0.73 percent.

The differential between Italian and German 10-year government bonds rose to 293 basis points on Monday from about 255 points before polls closed, indicating market jitters.

A lacklustre turnout compared with previous votes also reflected widespread frustration among voters fed up with austerity cuts and grinding recession.

Turnout was 75.17 percent -- five percentage points lower than in 2008.

-- 'A tragi-comic moment' --

Bersani, 61, says he is the best man to promote a growth agenda for Europe and "turn the page" after Berlusconi.

The former communist has said he will abide by the budget discipline enforced by Monti, a former Eurocrat roped in after Berlusconi's ouster at the height of Europe's financial crisis in 2011.

But Bersani would face pressure from trade unions and many ordinary Italians who have seen unemployment rise to record highs.

The down-to-earth Bersani, the son of a car mechanic, has tried to overcome his image as a party apparatchik and has surrounded himself with a youthful team with many women in the ranks.

Bersani's arch-rival Berlusconi has waged a populist campaign, blaming Germany for Italy's economic woes and promising to refund an unpopular property tax to Italians -- out of his own pocket if needed.

The 76-year-old media tycoon, who was mobbed by three topless feminists in a protest as he cast his ballot on Sunday, is a defendant in two trials -- for tax fraud and for allegedly having sex with an underage prostitute.

He is also the only post-war prime minister to have served out a full term of five years. The Milan native has been prime minister three times in 20 years.

"We're living a tragi-comic moment, with lots of fantastical promises, and I don't think whoever wins will have a stable majority," said Luciano Pallagroni, 77, as he voted in Rome.