Italy gridlock deepens as Europe watches nervously

ROME (AFP) - Italy's political gridlock deepened on Wednesday with bickering between the main leftist party and a new anti-establishment movement, putting off the prospect of a new government soon after elections that have spooked Europe.

Comedian turned populist firebrand Beppe Grillo said his Five Star Movement (M5S) would not endorse the Democratic Party (PD), which won the most votes in the elections on Sunday and Monday but not enough to form a majority in parliament.

"The M5S is not going to give a vote of confidence to the Democratic Party or to anyone else," Mr Grillo, who has channelled the frustrations of austerity-weary Italians, wrote on his blog.

The comment appeared to be a rejection of overtures from the PD, which on Tuesday suggested working with M5S on key measures like slashing government costs and helping Italy's poorest get through a grinding recession.

Mr Grillo said the PD had made a series of "indecent proposals", prompting PD leader Pier Luigi Bersani to hit back with a statement saying: "If Grillo has something to say to me, including the insults, I want to hear it in parliament."

Mr Grillo, who has called for a referendum on the euro and won a quarter of the vote in parliament, said the PD could ally with Silvio Berlusconi's centre-right coalition for a short-term before new elections would have to be called.

The scandal-tainted Berlusconi, dismissed as a spent force just months ago after 20 years in politics, came in an extremely close second to the centre-left and ahead of the Five Star Movement.

He said waiting until the new parliament is slated to meet on March 15 to begin coalition talks on forming a government was way too long.

"If there is no message of stability before then we risk paying too high a price," the three-time prime minister and billionaire tycoon said in a video message.

Berlusconi has promised to refund an unpopular property tax - if necessary out of his own pocket - and has blamed a "hegemonic" Germany for many of Italy's current economic woes.

After initial market panic on Tuesday, investors were more measured on Wednesday, especially after a better-than-expected bond auction in Rome.

European capitals remained nervous however amid fears Italy could turn back the clock on reforms following an election that has been seen as crucial for the future of the eurozone.

Meanwhile Italian President Giorgio Napolitano cancelled planned talks with the man bidding to unseat German Chancellor Angela Merkel after he called two Italian political players "clowns." Commenting on the inconclusive vote in Italy, Peer Steinbrueck said late Tuesday he was "downright appalled that two clowns won" - a reference to the big votes won by showman Grillo and scandal-tainted ex-premier Berlusconi.

German government officials such as Foreign Minister Guido Westerwelle have called on Italy to continue on the path of reform pursued by outgoing Prime Minister Mario Monti that led to improved confidence in the financial markets.

Italians have "understood nothing", said the German centre-left Sueddeutsche Zeitung, while the conservative Die Welt groaned "Poor Italy!" "The outcome of the elections was even more confusing than we had anticipated," Italian investment bank Mediobanca said.

Moody's credit ratings agency warned it might downgrade Italy, saying the vote result "increases the risk of political paralysis and prolongs political uncertainty".

The ratings agency added: "This week's elections have implications well beyond Italy itself and are, indirectly, credit-negative for other pressured euro area sovereigns." But after talks with Monti in Brussels, European Commission head Jose Manuel Barroso said he was confident Italy will be politically stable.

"Barroso expressed his full confidence that Italy, as one of Europe's and the world's biggest economies, will ensure the conditions of political stability in the interest of Italy and Europe as a whole," an official statement said.

Backroom negotiations are already under way but most analysts warn there will have to be new elections sooner or later.

The PD-led coalition took the lower house of parliament but no party won a majority in the upper house and support in both chambers is needed in order for a government to be formed.

The current government stays in place until then.

The possibility of a minority centre-left government reliant on votes from other parties in the Senate on a case-by-case basis has been judged as possible but "highly unstable" by analysts.

Leading Italian bank Intesa Sanpaolo warned the suspense could last for weeks.

"Uncertainty may characterise the coming weeks," it said.

Italy is enduring its longest recession in 20 years and unemployment rates are at record highs.

Mr Monti was the big election loser, taking just 10.56 per cent in the lower house, the Chamber of Deputies.

His technocratic government won praise from other European leaders, but his austerity drive was unpopular at home.

Mr Bersani has warned the huge anti-austerity protest vote should be heeded beyond Italy's borders.

In his first speech following the vote, Mr Bersani said on Tuesday: "The bell tolls also for Europe."