Italy vote uncertainty weighs on European shares

LONDON (REUTERS) - Uncertainty over the Italian election outcome dragged European indexes off their highs on concern that an unclear outcome could hamper the country's effort to implement economic reforms.

Italian shares and bonds lost earlier gains after election projections showed former prime minister Silvio Berlusconi's conservative bloc leading in the Senate, contradicting initial exit polls and raising the spectre of deadlock in parliament.

The pan-European FTSEurofirst 300 index provisionally closed up 0.1 per cent at 1,166.73 points, off a high of 1,174.24 points.

If no stable government is formed, voters could be forced to return to the polls, thereby fuelling short-term market volatility.

Kevin Lilley, European equity fund manager at Old Mutual Asset Managers, said he had sold off bank stocks in the run-up to the Italian vote and could sell more equities if the centre-right party headed by Silvio Berlusconi won the Senate.

"It will be 'risk-off' if Berlusconi wins. Italian bond yields will go up in the short-term," he said.

Toby Campbell-Gray, head of trading at Tavira Securities, said European equity markets would be choppy while the Italian situation remained unclear.

"The market's going to become a little bit more volatile until the conclusion of the vote," he said.