* TV projections point to victory for Berlusconi's PDL in
* Initial polls had pointed to victory for centre-left
* Italian bourse index and bonds erase gains
By Lisa Jucca and Stephen Jewkes
MILAN, Feb 25 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.
While polls indicated the centre-left should win the lower
house, projections based on early vote counts from television
channels pointed to a victory for media tycoon Berlusconi in the
key region of Lombardy, which holds the key to controlling the
upper house. The situation remained confused, however.
"I was bowled over by the magnitude of the turn around. It
all seems a bit excessive to me and so I think we should wait,"
a Milan fund manager said after a buying run immediately after
polls showed the left ahead in both houses had been reversed.
"It's clear that from a foreign investor point of view
they're very concerned about political instability and forming a
government that can push through pro-growth policies in Italy
and in Europe," the fund manager said.
"It's an emotive reaction."
State television RAI said Berlusconi's bloc was ahead with
31.6 percent in the Senate, with the centre-left at 29.4
percent. Beppe Grillo's protest 5-Star-Movement was at 24.9
percent, on course to be the biggest single party.
The centrist party of technocrat Prime Minister Mario Monti,
the darling of international investors, stood at 9.2 percent.
Initial telephone polls published when voting ended at 3
p.m. (1400 GMT) had put the centre-left Democrats (PD) on course
for full control and the later, conflicting signals led to
highly volatile trading as investors fretted over the prospect
of political gridlock in the euro zone's third largest economy.
The Milan blue-chip index closed up 0.73 percent at
1630 GMT, having earlier gained nearly 4 percent.
The spread between Italian 10-year government bonds and
equivalent German Bunds widened back to 280 basis points after
earlier dipping below 255 basis points.
The market had initially soared on hopes of a clear-cut
outcome, which would have created scope to push through reforms
to revive Italy's recession-hit economy.
"The market's initial reaction was too optimistic. We
thought the PD would have won a majority in the lower house, and
that's a given. But the Senate is still up in the air, region by
region," said Alberto Gallo, credit strategist with Royal Bank
"If the PD gets 156 seats in the Senate but Monti in several
regions doesn't win the minimum 8 percent of the vote then even
a PD-Monti alliance would have a very thin majority, something
which the market would not like."
The euro pared gains against the dollar and the yen
in the wake of the Italian election projection, with forex
traders closely following political developments in Italy, the
euro zone's third-largest economy.
UniCredit, which had led an Italian bank rally
with gains of more than 8 percent, erased all gains.
Berlusconi's Mediaset, which had suffered losses in the
run-up the elections, was up 1.43 percent.
Opinion polls before the vote and a low turnout on the first
day of voting on Sunday prompted some traders to place bets
already earlier on the day on a victory for the centre-left
Democratic Party (PD) of Bersani in coalition with Monti.
Heavy snow in several Italian cities and bad weather
elsewhere kept some voters away from polling stations on Sunday,
when turnout was around 55 percent, down from 62.5 percent at a
Earlier on Monday, the Italian Treasury paid slightly higher
borrowing costs to sell 4.07 billion euros - near the top of its
targeted amount - of 2-year zero-coupon bonds and