Italian leftist leader seeks way out of deadlock

Italian leftist leader Pier Luigi Bersani faced weeks of tough talks after admitting he had "come first but not won" key elections, as the markets reacted nervously to the political stalemate.

Bersani warned that the huge anti-austerity protest vote that left the Italian parliament at an impasse should be heeded beyond Italy's borders. "The bell tolls also for Europe," he said.

"We are aware that we are in a dramatic situation, we are aware of the risks that Italy faces," Bersani said on Tuesday in his first speech since the vote.

Final results showed that while his coalition had won the lower house, no party had taken the upper house.

The election was seen as crucial for the eurozone, which fears that a return to political instability in Italy could send shock waves across a euro area still struggling with a debt crisis.

Stocks plunged around the world and Italy's borrowing rates jumped, as analysts warned the eurozone's third economy could face fresh elections within months to break the gridlock.

And as Asian markets opened Wednesday, the euro remained under pressure.

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

Bersani called for an agreement with other parties on basic reforms everyone could agree on -- cutting government costs, reforming the labour market and helping the poorest as Italy endures its longest recession in two decades.

Analysts said this could be seen as a possible opening to the Five Star Movement (M5S) led by comedian turned anti-corruption firebrand Beppe Grillo, which won dozens of seats in both houses.

Bersani admitted he had been "overtaken" by the protest vote after M5S became the biggest single party in parliament, not counting coalitions.

Under the constitution, parliament has to meet within 20 days of an election, after which formal negotiations begin with Italian President Giorgio Napolitano on forming a new government.

The coming weeks are likely to be thick with backroom negotiations, with Grillo's political newcomers at the centre of the discussions.

European leaders were quick to voice concern.

German Finance Minister Wolfgang Schaeuble said he was "not exactly pleased" at the results and expressed his desire for "a stable government".

French Finance Minister Pierre Moscovici said the outcome, while it created problems, did not threaten the eurozone. But he urged Italy to form a solid government quickly.

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

The European Commission said it had heard "the message of concern" from Italian voters but expected the country to stick to its pledges of budget cuts and economic reforms.

"Italy has made commitments," Commission spokesman Olivier Bailly told reporters. "As far as we are concerned these commitments remain."

A coalition led by irrepressible tycoon Silvio Berlusconi confounded all poll predictions by coming in an extremely close second in the vote for the lower house, winning 29.18 percent to Bersani's 29.54 percent.

The scandal-tainted billionaire had promised to refund an unpopular property tax -- if necessary out of his own pocket.

But the populist, anti-government M5S harvested a resounding protest vote from an electorate fed up with austerity policies and a grinding recession, scoring 25.5 percent in the lower house.

"We're not against the world," Grillo told reporters on Tuesday at a lively press conference in which he also called for Nobel prize-winning playwright Dario Fo to be Italy's next president.

"We'll see reform by reform, law by law. If there are proposals that are compatible with our programme, we will evaluate them," he said.

In a post on his popular blog, Grillo added: "The M5S is not allying with anyone."

Ratings firm Standard & Poor's gave its verdict from Washington.

"The Italian general election results have no immediate implications for Italy sovereign ratings," currently at BBB+ with a negative outlook for the country's long-term debt, S&P said.

Analysts said there were two likely options -- either the centre-left could form a loose alliance with M5S in the Senate, or an emergency government could be formed to pass key reforms and call new elections.

"The country which most needs stability will not have a government that lasts for more than a few months," said James Walston, professor of international relations at the American University in Rome.

Outgoing prime minister Mario Monti was the big election loser, taking just 10.56 percent in the lower house, the Chamber of Deputies.

His technocratic government, which replaced Berlusconi after he was ousted at the height of the financial crisis in 2011, won praise from other European leaders, but his austerity drive was unpopular at home.