UPDATE 1-Euro zone sentiment falls in March after Italy election deadlock
BERLIN, March 4 (Reuters) - Euro zone sentiment fell sharply in March, halting a six-month rise after an inconclusive election in Italy, the region's third- largest economy, rattled investors, Sentix said on Monday.
Investor morale in Germany, however, showed further modest improvement in March, highlighting the contrast in fortunes between the euro zone's largest economy and its ailing, debt-ridden southern periphery.
The euro fell to a session low and not far from a 2-1/2 month trough after the Sentix data release, which increased the possibility of the European Central Bank lowering interest rates in the near term.
Sentix said its monthly index tracking investor sentiment in the 17-nation euro zone fell to -10.6 in March from -3.9 in February and well below a Reuters consensus forecast of -5.2. The data is based on a survey of 989 investors.
"The reason for this setback is obvious: it is the outcome of the election in Italy which has caused uncertainty over the country's future development to skyrocket," Sentix senior analyst Sebastian Wanke said in a statement.
"This has had a negative impact on the whole euro zone."
Italy's election on Feb. 24-25 left no party with a working majority in parliament and two parties opposed to austerity policies - which financial markets view as necessary in Italy - made strong gains in the election.
The main political parties have made no progress towards forming a stable government, raising the prospect of fresh elections and the spread between Italian 10-year benchmark bonds and German bunds, a measure of investor confidence, widened on Monday to an almost three-month high.
A sub-index of expectations fell to 8.3 in March from 15.8 in February. Current conditions stood at -27.8, down from -21.8 last month.
However, Sentix said it believed the poor euro zone readings for March were a temporary blip rather than the start of a new negative trend because the global economic recovery remained intact and even within the currency bloc Germany did well.
A separate index for Germany showed investor sentiment rose to 24.5 in March, its highest level since July 2011 and up slightly from 24.3 last month.
The sentiment index for the United States stood at 12.9 in March, up from 12.7. For Asia excluding Japan it was 32.2, down from 34.3 last month.