* Center-right party opposed to austerity leads in Italy's
* U.S. stocks hit with worst losses in nearly four months
* Euro falls vs dollar and yen, dollar also slides vs. yen
By Caroline Valetkevitch
NEW YORK, Feb 25 Stocks dropped and the euro
fell to a more than six-week low on Monday after an uncertain
outcome in Italy's elections raised concerns that harsh economic
reforms in the region's struggling nations could stall and
reignite the euro zone's debt crisis.
The U.S. benchmark, the Standard & Poor's 500 index,
suffered its worst one-day percentage decline since Nov. 7,
while the euro fell more than 3 percent against the yen.
Investors sold Italian sovereign debt and flocked to
benchmark U.S. Treasury bonds, pushing their yields to the
lowest levels in a month.
Voting projections in Italy showed no coalition strong
enough to form a government, raising the possibility of deadlock
in parliament. That 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.
"Europe hasn't gone away as an issue. It is going to hang
around, and it is rearing its ugly head today," said Stephen
Massocca, managing director of Wedbush Morgan in San Francisco.
Italy's main stock index finished the day higher, but as
details of the voting emerged following the European market
close, an exchange-traded fund tracking Italy's market fell
sharply, suggesting possible losses on Tuesday.
The iShares MSCI Italy Capped ETF ended the day down
With more than two-thirds of the vote counted, projections
suggested the center left could have a slim lead in the race for
the lower house of parliament.
The center-right coalition is led by former Prime Minister
Silvio Berlusconi and has attracted substantial support from
voters worried about austerity measures.
The MSCI world equity index fell 0.7
percent, reversing earlier gains.
Italy's main FTSE MIB stock market index rose 0.7
percent, but 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. European markets closed before the
latest vote totals.
On Wall Street, the Dow Jones industrial average fell
216.40 points, or 1.55 percent, to end at 13,784.17. The
Standard & Poor's 500 Index was down 27.75 points, or
1.83 percent, at 1,487.85. The Nasdaq Composite Index
was down 45.57 points, or 1.44 percent, at 3,116.25.
In the foreign-exchange market, the euro fell as low
as $1.3077 on Reuters data, the lowest since Jan. 10. It was
last down 0.6 percent at $1.3096.
Against the yen, the euro fell as low as 120.88 yen
, the weakest since Jan. 25. It was last at 121.68,
down 1.2 percent.
The uncertainty around the Italian elections adds a level of
instability and risk back into markets that had mostly been
gone, according to Jens Nordvig, chief currency strategist at
Nomura Securities in New York.
"Political risk in the euro zone should not be ignored," he
wrote in a note. "Lack of reform momentum in Italy may over time
impact the (European Central Bank's) ability to backstop its
bond market, implicitly and explicitly."
U.S. Treasury debt prices rose and benchmark yields slid to
the lowest level in a month amid the uncertainty in Italy. The
benchmark 10-year U.S. Treasury note was up 28/32, the yield at
DOLLAR DOWN VS YEN
The dollar lost 1.7 percent to 91.75 yen, reversing
early gains that drove it to a more than 33-month high of 94.76
yen, according to Reuters data.
The yen weakened after news that Japan's prime minister,
Shinzo Abe, is likely to nominate an advocate of aggressive
monetary easing, Asian Development Bank President Haruhiko
Kuroda, as the next central bank governor to step up his fight
to rid the country of deflation.
Abe's repeated calls for more forceful central bank action
are largely behind the yen's nearly 20 percent loss in value
against the dollar since November.
MORE GRIDLOCK AHEAD
The euro could continue to lose ground if risk appetite
abates. President Barack Obama and the U.S. Congress remain
deadlocked over how to prevent $85 billion in automatic
government spending cuts set to start taking effect on March 1.
Investors also are looking ahead to testimony by Federal
Reserve Chairman Ben Bernanke to Congress on Tuesday and
Wednesday, in which he is expected to downplay the idea that the
central bank could prematurely end its current massive monthly