Parties may struggle to form government in Italy

A centre-left group of parties appears to have the best shot at forming a coalition government in Italy after an inconclusive national election, but the challenge is steep and comes amid public anger over austerity measures.

If Italian parties fail to form a governing coalition, new elections would be required, causing more uncertainty and a leadership vacuum, and that possibility rattled financial markets across Europe yesterday.

In early today trading in Milan, the FTSE MIB rebounded 0.5% even though the country had to pay higher borrowing costs in a pair of bond auctions. The index has a long way to go to recoup the previous day's 4.9% fall though.

Pier Luigi Bersani and his centre-left allies appeared yesterday to have won a narrow victory in the lower house of parliament, while the Senate looks split with no party in control. Silvio Berlusconi, the former Italian premier whose centre-right coalition did better than expected, is a key player since his coalition is now the second-biggest bloc in the upper chamber.

Comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalised on a wave of voter disgust with the ruling political class, had a surprisingly strong showing. His bloc of seats in Parliament could prove crucial in making any coalition government viable.

The two-day election on Sunday and Monday also was a clear rejection of the previous technocratic government led by Mario Monti. That government enacted wide-ranging reforms to the budget and the economy. Though its borrowing rates have fallen in financial markets, the cost to Italians has been high, with Italy mired in recession and unemployment on the rise.

Berlusconi has already ruled out an alliance with Monti, his predecessor, whom he blamed for driving Italy deeper into recession.

Yesterday, a few seats in Parliament based on Italians' voting abroad still remained to be decided, but their numbers won't ease the gridlock.

European leaders pleaded with politicians in Italy to quickly form a government to continue to enact reforms to lower Italy's critically high debt and spare Europe another spike in its four-year financial crisis.

Bersani said he was not opening talks with any potential partners until he submits his program to Italy's president, who taps a candidate to form a government.