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LONDON, Feb 26 (Reuters) - European shares fell on Tuesday after elections in Italy left the country facing political deadlock, with banks suffering the most as the vote raised new fears over the euro zone's debt crisis.
The pan-European FTSEurofirst 300 index declined by 1.3 percent to 1,151.73 points while the euro zone's blue-chip Euro STOXX 50 index fell 2.6 percent to 2,584.98 points.
Italy's benchmark FTSE MIB equity index slid an initial 1.6 percent but that was before the country's banking stocks began trading. When they did the market as a whole quickly became the worst performing, down 5 percent.
Market concern that the country's election result, in which anti-euro parties took more than 50 percent of the vote, could hamper economic reforms and fuel its costs of borrowing, was seen most markedly in the financials sector.
The STOXX Europe 600 Banking Index was the worst-perfoming European equity sector, falling 2.8 percent, led by falls for Italian lender Intesa Sanpaolo, down 10 percent.
"There's no clear outcome in the Italian election, and the markets hate uncertainty," said Terry Torrison, managing director at Monaco-based McLaren Securities.
"You could easily see a three or four percent sell-off in the next couple of sessions," he added.
Syz Asset Management's chief economist, Fabrizio Quirighetti, saw a potential 5 percent fall on European equity markets this week and added that Spain could face fresh pressure, with the Spanish IBEX equity index falling 3.4 percent.
Clairinvest fund manager Ion-Marc Valahu said he had been buying the Euro STOXX Volatility index on expectations of an uncertain Italian vote result. The index closed at 21.35 points on Monday, close to its 2013 high.