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By Lisa Jucca and Francesca Landini
CERNOBBIO, Italy (Reuters) - Former comic Beppe Grillo's triumph in Italy's election could herald growth-boosting policies that investors would broadly welcome although his call for a vote on leaving the euro could unnerve markets.
Grillo's populist 5-Star Movement emerged as the largest party in a general election last month after voters turned against the austerity measures introduced by outgoing prime minister Mario Monti's government of technocrats.
With no party securing a parliamentary majority, Grillo - known for his vitriolic attacks on Italy's political and financial establishment - is left as political kingmaker. He has so far refused to join forces with other parties, but sparked controversy by suggesting Italy holds a referendum on its membership of the euro.
"I don't know what 5-Star Movement suggests. Does anybody really know?," Goldman Sachs Asset Management chairman Jim O'Neill told a European House conference in Cernobbio on Friday.
"But it is interesting that some Italian people want something different. If I were in Berlin or Frankfurt I would pay attention to it.
"The euro zone cannot survive on constant austerity for so many different countries because all it does is lead to more unemployment, but not reduce debt," O'Neill added.
After a brief negative reaction to the indecisive election result, financial markets have stabilised as they await a new government for the euro zone's third-largest economy, or - if one cannot be formed - a fresh vote to break the stalemate.
While praising Monti for his efforts to reform the pension system and improving Italy's finances, investors say not enough was done to cut spending and improve the business environment.
"Italy has done all it could in terms of rising taxes," said Jim Cowles, Citi's CEO for Europe, Middle East and Africa.
"The important thing for the next government is not to lose ground on what it has achieved and to start tackling other kinds of reforms ... that can improve labour productivity, reducing red tape and making it easier to start a new business.
"The good news is that these reforms are not austerity."
Tax hikes and spending cuts undertaken by Monti brought Italy's primary surplus - the budget surplus before debt servicing costs - to 2.5 percent of output in 2012, the highest in the euro zone, but debt reached 127 percent of GDP.
Unless it can revive its stagnant economy, Italy is unlikely ever to significantly reduce its 2 trillion euro debt pile.
The European Central Bank's pledge to stand by the euro has so far prevented the political deadlock pushing Italy's borrowing costs sharply higher, but investors and credit rating firms could lose patience if a resolution does not come soon.
Some already have begun to question the value of the ECB's backstop, given that it would require a government committed to the economic reforms and debt-cutting austerity measures decisively rejected by Italians at the polls.
Fitch Ratings on Friday cut Italy's sovereign credit rating to BBB-plus from A-minus, citing likely delays to reforms without a stable government, and assigning a negative outlook.
"Grillo spoke in favour of a referendum on Italy's euro membership and restructuring of the debt ... if there are expectations he could win a majority in a new election, the spread could go very high," said economist Nouriel Roubini.
The challenge for the centre-left PD party, which holds a majority in the lower house but not the Senate, is to win support to form a new government and consolidate the progress made under Monti.
"I don't know of a single country where voters want austerity," said Evgeny Gavrilenkov, chief economist at Sberbank CIB in Russia. "That is why it is very important to have the political will and do the reforms as fast as possible. You cannot be in an austerity mode for years."
(Additional reporting by Luca Trogni; Editing by Catherine Evans)