UPDATE 10-Huge protest vote leaves Italy facing deadlock
* Global markets shaken by fears of new euro zone instability
* Vote is stunning success for populist movement
* Berlusconi stages comeback but cannot govern alone
* Centre-left big losers although will try to form government
By Barry Moody and James Mackenzie
ROME, Feb 25 (Reuters) - A huge protest vote by Italians enraged by economic hardship and political corruption left the euro zone's third-largest economy facing a dangerous vacuum on Monday after an election in which no group won enough votes to form a government.
The result, in which anti-euro parties took more than 50 percent of the vote and a novice populist movement scored a stunning success, rocked global markets with fears of a new euro zone crisis.
Europe's common currency slumped against the dollar and yen and U.S. stocks suffered their biggest one-day drop since November.
With more than 99 percent of returns in from polling stations, results showed the centre-left had taken a slim victory of around 130,000 votes in the lower house of parliament, enough to give it comfortable control thanks to a big winner's bonus.
But no party or likely coalition won enough seats to form a majority in the upper house, creating a deadlocked parliament - the opposite of the stable result that Italy desperately needs to tackle a deep recession, rising unemployment and a massive public debt.
The outcome fanned fears of a new European financial crisis, with prospects of a long period of paralysis and uncertainty in Italy.
"This is the worst possible outcome from the market's point of view ... It seems inevitable that there will be a new election," said Alessandro Tentori, Citigroup head of global rates.
The result was an extraordinary success for Genoese comic Beppe Grillo, leader of the populist 5-Star Movement, who toured the country in his first national election campaign hurling obscenity-laced insults against a discredited political class.
He was set to become the biggest single party in the lower house, riding a potent wave of anger against rampant waste and corruption by ageing political leaders.
His success fulfilled the predictions of some analysts that the most uncertain and closely watched election in years would herald a political revolution. "This is the end of a system, not a government," respected commentator Massimo Franco told Reuters before the vote.
Grillo polled more around a quarter of the vote in a meteoric rise from the 1.8 percent he garnered in his movement's first local political test in 2010.
The result was a humiliating slap in the face for colourless centre-left leader Pier Luigi Bersani, who threw away a 10-point opinion-poll lead less than two months ago against Silvio Berlusconi's centre right.
He failed to turn up for a press conference after the result became clear. His deputy, Enrico Letta, as well as outgoing technocrat premier Mario Monti, said responsible forces must form a government and avoid another election. But the result raised a big question over whether that would be possible.
Billionaire media magnate Berlusconi, 76, who staged an extraordinary comeback from sex and corruption scandals since diving into the campaign in December, came in a close second in the Senate race, with an estimated 117 seats.
With almost all results in, the centre-left was set to take 121 seats in the upper house, Grillo 54, and Monti languishing on only 22 after a campaign which never took off. The Senate majority is 158.
Berlusconi, a master politician and communicator, wooed voters with a blitz of television appearances and promises to refund Monti's hated housing tax despite accusations from opponents that this was an impossible vote buying trick.
Grillo has attacked all sides in the campaign and ruled out a formal alliance with any group although it was not immediately known how he would react to his stunning success or how his supporters would behave in parliament.
The next move to solve the crisis will be when head of state Giorgio Napolitano calls in political leaders to discuss how to form a government. But this is not expected until March 10 after the election result is formally confirmed and parliament convened.
Letta said the centre-left, as biggest party in the lower house, had the right to be the first to try to form a government.
DANGER OF NEW ELECTION
Investors fear a return of the kind of debt crisis that took the euro zone close to disaster and brought the technocrat Monti to office, replacing Berlusconi, in 2011.
The results showed more than half of Italians had voted for the anti-euro platforms of Berlusconi and Grillo.
A centre-left government either alone or ruling with Monti had been seen by investors as the best guarantee of measures to combat a deep recession and stagnant growth in Italy, which is pivotal to stability in the currency union.
But the failure of Monti to gain traction at the head of a centrist force, despite support from business leaders and foreign governments, and the weak showing by the centre-left meant they do not have nearly enough Senators to do this.
The upper and lower houses have equal law-making power.
The benchmark spread between Italian 10-year bonds and their German equivalent widened from below 260 basis points to above 300 and the Italian share index lost all its previous gains after projections of the Senate result.
Monti helped save Italy from a debt crisis when Rome's borrowing costs were spiralling out of control in November 2011, but few Italians now see him as the saviour of the country, which is reeling under its longest recession for 20 years.
Grillo's movement rode a wave of voter anger about both the pain of Monti's austerity programme and a string of political and corporate scandals. It had particular appeal for a frustrated younger generation shut out of full-time jobs.
"I'm sick of the scandals and the stealing," said Paolo Gentile, a 49-year-old Rome lawyer who voted for 5-Star. "We need some young, new people in parliament, not the old parties that are totally discredited."
Berlusconi, a billionaire media tycoon, exploited anger against Monti's austerity programme, accusing him of being a puppet of German Chancellor Angela Merkel, but in many areas Grillo was a bigger beneficiary of public discontent.
Italians wrung their hands at prospects of an inconclusive result that will mean more delays to essential reforms.
"It's a classic result. Typically Italian. It means the country is not united. It is an expression of a country that does not work. I knew this would happen," said 36-year-old Rome office worker Roberta Federica.
Another office worker, Elisabetta Carlotta, 46, shook her head in disbelief. "We can't go on like this," she said.
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