* Projections show center-right leads in Italy's Senate elections
* An index of world stocks dips as U.S. stocks drop
* Euro falls vs. dollar and yen, dollar also slides vs. yen
By Caroline Valetkevitch
Feb 25 Stocks and the euro fell on Monday as concern grew that an unclear outcome in Italy's elections could hamper the country's effort to implement economic reforms.
Conflicting early forecasts of the outcome of Italy's election raised the possibility on Monday of deadlock in parliament, which could paralyze a new government and reignite the euro-zone crisis. Officials warned that such gridlock could make Italy ungovernable and could force new elections.
The center-right coalition led by former Prime Minister Silvio Berlusconi was leading in the race for the Italian Senate after the first projections, dashing early hopes of a pro-reforms center-left victory in the vote.
In Italy's lower house, TV projections said that Italy's center-left was seen to have a slim lead over the centre right.
The election's outcome is expected to hold the key to whether the current reform program will continue uninterrupted in the euro zone's third-largest economy. A victory by the center-right coalition could cause instability in one of the euro zone's largest economies as Italy copes with a deep recession and weak growth.
The market would celebrate a center-left victory because investors believe that coalition government would continue the path to pay down Italian debt, said Art Hogan, managing director of Lazard Capital Markets in New York.
"What we don't want to hear is a renewed fear about a euro- zone fracture," Hogan said.
The MSCI world equity index dipped 0.1 percent, reversing earlier gains.
In contrast, Italy's main FTSE MIB stock market index rose 0.7 percent, having pared early gains of more than 3 percent, while the pan-European FTSEurofirst 300 index edged up 0.04 percent to close at 1,166.07.
On Wall Street, the Dow Jones industrial average slid 87.44 points, or 0.63 percent, to 13,913.13. The Standard & Poor's 500 Index dropped 11.84 points, or 0.78 percent, to 1,503.76. The Nasdaq Composite Index fell 15.13 points, or 0.48 percent, to 3,146.69.
In the foreign-exchange market, the euro fell 0.6 percent against the dollar to $1.3109. Against Japan's yen, the euro lost 1.7 percent to trade at 121.12 yen.
"A centre-right victory or a hung parliament threatens the continuity of ... painful, but necessary fiscal reforms that have been in place," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.
In early trading, the yen had fallen for a second straight session against the dollar on news that Japan's prime minister is likely to nominate Asian Development Bank President Haruhiko Kuroda as the next central bank governor to step up his fight to rid the country of deflation.
Earlier on Monday, the dollar had shot up to 94.76 yen earlier on Monday, a high not seen since May 2010.
But by late afternoon in New York, the dollar had reversed course against the yen - in sync with the euro's slide against Japan's currency. The dollar fell 1 percent against the yen to trade at 92.46 yen.
BOND PRICES CLIMB, BERNANKE AHEAD
The U.S. 30-year Treasury bond jumped a full point in price and its yields slid to a one-month low following the uncertainty raised in the Italian exit polls.
The 30-year U.S. Treasury bond shot up 1-2/32 in price to yield 3.10 percent, marking the lowest since Jan. 25, and down from 3.15 percent late Friday.
The benchmark 10-year U.S. Treasury note shot up 18/32 in price to yield 1.90 percent, down from 1.96 percent late Friday.
U.S. crude dipped 2 cents to $93.110 a barrel, while gold prices rose on increasing hopes of a technical rebound. Spot gold added 0.6 percent to $1,588.91 an ounce.