* Euro STOXX 50 down 3.1 pct, lowest close since November
* Italy's FTSE MIB falls 4.9 pct on election stalemate
* Investors snap up put options to insure against market
By Toni Vorobyova and Alistair Smout
LONDON, Feb 26 Euro zone shares sank to
three-month lows on Tuesday after an Italian election stalemate
renewed concerns about the future of the euro zone and sent
investors in search of insurance against a deeper sell-off.
No group managed to secure a majority in the Italian
parliament, heralding weeks of political uncertainty and raising
the prospect of a government of sworn enemies - the centre right
led by former prime minister Silvio Berlusconi and the centre
left under Pier Luigi Bersani.
"In the medium term we think that Italy is unlikely to
abandon reforms or leave the euro, but the politics before then
could turn into a game of chicken. And equity markets really
hate games of chicken," said Derry Pickford, macro analyst at
investment manager Ashburton.
Italy's benchmark FTSE MIB index sank 4.9 percent
to 15,552.20 points, posting its biggest daily fall in nearly a
year and with all but two of its 40 companies in the red.
The EuroSTOXX 50 index closed down 3.1 percent at 2,570.52
points, its lowest finish since Nov. 28. The move
extends the euro zone blue chip index's retreat from an 18-month
high of 2,754.80 points hit at the end of January.
The broader, pan-European FTSEurofirst 300 fell 1.4 percent
to 1,150.25 points.
"It introduces a whole range of uncertainty at a time when
the markets were quite toppy anyway and were probably ready for
some sort of correction," said Paul Jackson, strategist at
Worries about a new flare-up in the euro zone's debt crisis
fed through to the bank sector, whose lenders could be hit with
new writedowns and bad debts if the region's economy weakens as
a result of debt problems in countries such as Italy and Spain.
The STOXX Europe 600 Banking Index was the
worst-performing sector, falling 3.1 percent with Italian banks
such as Intesa and Unicredit - which own
large amounts of Italian government debt - tumbling 9.1 and 8.5
Spooked by the steepness of the fall, investors rushed out
to buy put options - which give the right to sell the index at a
pre-set price in the future, thus protecting against or simply
betting on a fall in the market.
Implied volatility on the euro zone index - a crude
barometer of investor risk aversion, based on how much people
are willing to pay for options - surged 21.5 percent to new 2013
highs, though at 25.90 points it was still some way
below last year's peak of 38.31 points.
Investors also sought refuge in sectors which earn most of
their profits outside the euro zone and should thus be less
affected by any crisis there.
Within those, Simon Maughan, strategist at Olivetree
Securities, recommended focusing on stocks which have
underperformed so far this year and those which pay dividends.
"If you look at the relative performance of Energy, Basic
Resources and some Industrials, they are outperforming
markedly," he said. "Hiding out in these sectors, as well as
utilities and some telcos, is the way to lose as little money as
possible in this latest storm, which has its eye on Italy, but
with cross winds throughout Europe and in France in particular."
The STOXX 600 Basic Resources index fell only 0.2
percent, making it one of the best performing sectors.
Analysts said that in the longer term the current sell off
could offer an attractive opportunity to snap up cheap European
stocks, but cautioned that it may be soon to start buying in - a
view that was also backed by technical analysis charts.
"The Italian index has not yet reached an obvious support,
it is too early to step back into equities," Valerie Gastaldy,
analyst at Day By Day, said in a note.
"The weekly chart of the FTSE MIB shows that the index is
back into its large trading range, between 12,320 and 17,000.
When an index breaks out and then reintegrates such a pattern,
we can expect it to move back to the middle of the range. This
level would be around 14,715."
That would imply a drop of around 5 percent from current