Italian leftist leader signals way out of deadlock

Italian left leader Pier Luigi Bersani admitted Tuesday he had "come first but not won" crucial elections and asked parties to join him in key reforms to respond to Italians' most urgent needs.

Bersani also warned that the huge protest vote in the poll that left parliament deadlocked was a warning for leaders across the continent.

"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 in his first speech since elections that spooked Europe and the financial markets.

Final results showed his coalition had won the lower house but no party had taken the upper house.

The vote was seen as crucial for the eurozone, which fears 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 now face fresh elections within months to resolve the gridlock.

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 that everyone could agree on -- cutting government costs, reforming the labour market and helping Italy's poorest as the country 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.

But Bersani urged Grillo to outline his demands.

"Up until now they've said everyone should go home. Now they too are on the inside. Either they go home or they say what they want to do with the country," he said.

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 run-up to the convocation of parliament is likely to be thick with backroom negotiations in uncharted waters for Italy with the presence of dozens of political newcomers from Grillo's party.

European capitals were quick to voice concern.

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

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 said at a news conference. "As far as we are concerned these commitments remain."

Silvio Berlusconi's coalition came a close second in the vote for the lower house, winning 29.18 percent to Bersani's 29.54 percent.

The populist, anti-government M5S won big, reaping a resounding protest vote from an electorate fed up with austerity policies and a grinding recession to score 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."

European powerhouse Germany, and France, also reacted nervously, with German Foreign Minister Guido Westerwelle calling for a new government to be formed "as quickly as possible".

"The politicians in Rome know that Italy still needs a policy of reform, a policy of (budgetary) consolidation," he said.

Analysts said there were two likely options -- either the centre-left could seek a loose alliance with M5S in the Senate with support in parliament, 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.

Berlusconi Tuesday dismissed the idea of fresh polls, saying in an interview: "I don't think it would be useful in the situation. Monti and his austerity have put this country in danger."

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

Monti was drafted to run a technocratic government in the debt-strapped country after Berlusconi was ousted at the height of the financial crisis in 2011.

He won praise in Europe, but was criticised at home for his austerity measures.

The down-to-earth Bersani, the 61-year-old son of a car mechanic, has told Italians he is the best man to help promote a growth agenda for Europe and "turn the page" after Berlusconi.

But the scandal-tainted billionaire defied predictions of a crushing defeat, winning votes on a promise to refund an unpopular property tax -- out of his own pocket if needed.

Roberto D'Alimonte, political science professor at Rome's LUISS University, said simply: "We are in uncharted waters."