* MSCI World index down 0.6 pct on Italy vote concern
* U.S. stocks up on Bernanke comments
* Italian bond yields rise by most this year
By Caroline Valetkevitch
NEW YORK, Feb 26 Uncertainty generated by Italy's elections rattled global stock indexes and European bond markets for a second day on Tuesday, though testimony Federal Reserve Chairman Ben Bernanke and strong housing figures lifted U.S. stocks.
A closely watched gauge of European stock market volatility hit a 2013 high after the muddy election outcome raised fresh concern about the outlook for the euro zone's debt crisis.
Investors are fearful that the strength of the vote for anti-austerity parties will weaken efforts to reform Italy's public finances and its labor laws, damaging the euro zone's efforts to resolve its three-year old debt crisis.
Markets across Europe fell on the vote results, with Italy's FTSE MIB among the hardest hit, tumbling 4.9 percent.
U.S. stocks rose as Bernanke strongly defended the Fed's bond-buying stimulus, though worries about Italy and the euro zone kept a lid on S&P 500 gains.
"Europe is just one of the things that suggest we need to temper our enthusiasm further... this (vote) this should remind us the crisis has only been in remission," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. McCain sees further downside for stocks, including a possible correction.
The uncertainty has led to a sharp rise in volatility, with Europe's VSTOXX index, which reflects demand for protection against a drop in major European equities, hitting a new year's high on Tuesday at 24.73.
The MSCI world equity index was down 0.6 percent, while the pan-European FTSEurofirst 300 index ended 1.4 percent lower.
On Wall Street, the Dow Jones industrial average was up 105.39 points, or 0.76 percent, at 13,889.56. The Standard & Poor's 500 Index was up 6.52 points, or 0.44 percent, at 1,494.37. The Nasdaq Composite Index was up 3.79 points, or 0.12 percent, at 3,120.05.
Southern European government bond prices sank. Italy's 10-year bond yields were up as much as half a point to 4.86 percent, their highest since mid-December.
In the foreign exchange market, the euro dropped against the dollar and remained highly susceptible to further selling as political gridlock in Italy caused the government's borrowing costs to jump.
"The bad part of the results is that there is now a 'hung parliament,' or divided government," said Christopher Vecchio, currency analyst at DailyFX, in New York.
The euro last traded at $1.3048, down 0.1 percent on the day, but above $1.3017 hit during early London hours, which was its lowest since Jan. 7.
The dollar erased early gains and was down for a second straight day against the yen. It last traded at 91.34 yen , down 0.5 percent on the day and not far from a low of 90.92 yen on Monday, its lowest in nearly a month.
U.S. BONDS UP AFTER BERNANKE
U.S. Treasuries prices rose, leaving yields at one-month lows, following Bernanke's testimony and as worry about Italy and the euro zone fed the bid for safe-haven U.S. debt. However, they subsequently dipped slightly after a $35 billion sale of 5-year debt.
Bernanke's testimony to Congress eased worries that monetary policymakers might be getting cold feet about the Fed's bond-buying program. He also urged lawmakers to avoid sharp spending cuts set to start taking effect on Friday.
U.S. financial markets were rattled last week when minutes of the Fed's January meeting showed some officials were thinking of scaling back its monetary stimulus earlier than expected.
"Bernanke's commentary showed the Fed chairman wants to continue quantitative easing (i.e. bond purchases) and keep its general stance of monetary policy accommodation," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers.
The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.
The benchmark 10-year U.S. Treasury note was last down 2/32 , the yield at 1.872 percent.
Also helping U.S. stocks, U.S. home prices closed out 2012 with the biggest annual gain in more than six years, according to the S&P/Case Shiller index. U.S. government data showed that sales of new homes spiked in January, the latest sign that the long-suffering housing market was on the mend.
A separate report showed U.S. consumer confidence rose more than expected this month as Americans shrugged off worries about fiscal policy.