PARIS A weak showing for conservative President Nicolas Sarkozy in the first round of French elections further spooked investors already on edge about European governments' ability to manage their debt, pressuring French bonds and stocks on Monday.
Socialist favorite Francois Hollande came out on top with 28.6 percent, making Sarkozy, on 27.2 percent, the first sitting president to find himself behind after the first round.
Marine Le Pen channeled French anger at high unemployment and weak economic growth to take third place with a stronger than expected 17.9 percent, the highest any far right candidate has ever tallied.
French five-year credit default swaps rose 8 basis points to 207, in line with similar moves for other euro zone sovereigns, while the spread between French and German bond yields widened, and the CAC40 stock index slid, although still outperforming euro zone "peripheral" nations Spain and Italy.
Le Pen's success raised fears about increasing regional support for anti-euro populist politicians who could further damage a fragile consensus on how to manage the debt crisis in the months ahead.
The Dutch government is teetering on the verge of collapse after a right-wing anti-EU party there refused to back big budget cuts, pushing the Netherlands' AEX stock index down 2.5 percent by 0657 EDT (1057 GMT).
"What's news is the far right, not just in France but in the Netherlands. This is more worrying," said Dan Sayag, a fund manager at Amilton Asset Management in Paris.
French support for the euro has been relatively solid so far, with eight out of 10 French favoring their country's continued presence in the single currency, according to a February poll by Le Figaro newspaper.
The election, along with the Dutch political crisis, further rattled investors already nervous that Spain's shaky finances could drag the euro zone back into crisis.
The spread between French and German 10-year sovereign bonds widened to 154 basis points, up 9 bps on the day, as safe-haven German debt outperformed across the board.
"It's beginning to look like the perfect storm," said Stewart Richardson, chief investment officer at RMG.
"It looks like the French vote was more against Sarkozy than we would have thought last week, and so there is a leftward lurch in France," he said, adding that Hollande's policies would be "a pretty bad step for Europe as a whole".
The CAC40 was down 2.2 percent at 0657 EDT (1057 GMT), and the response might have been more marked, had many investors not already priced in a Socialist victory in France in recent months and cut their exposure to French equities, said Yohan Salleron, a fund manager with Mandarine Gestion in Paris, adding that his firm had done the same.
"When you look at the companies in which the French state has a significant role, like EDF, GDF Suez and France Telecom, our impression is that the market has penalized them from the beginning of the year," he said.
Salleron added that EDF had been sold off because of worries about the Socialists scaling back its nuclear production and France Telecom by fears that it would be a target for higher taxes as pressure rises for new ways to lower the deficit.
Some investors took solace in a weaker-than-expected showing by Communist-backed leftist Jean-Luc Melenchon. Melenchon immediately threw his support behind Hollande, reducing the likelihood that the Socialist front-runner could have to tack further to the left.
"The markets have begun sanctioning the weakness of François Hollande's proposals to improve the competitiveness of the French economy and Nicolas Sarkozy's lack of political leeway if he is elected," Exane BNP Paribas said in a research note.
Some investors have also worried that a victory for Hollande - who has said that his real opponent is the world of finance - would be negative for French banks, but Frederique Tassin, a fund manager with Aviva investors said: "I don't see any reason why Hollande should dramatically hurt the sector."
He added that any banking sell-off might just last a few days and that bad news was already priced heavily into the banks.
France's largest bank BNP Paribas was down 4.1 percent, underperforming the European sector.
(Reporting By Christian Plumb, Alexandre Boksenbaum-Granier and Nina Sovich in Paris and Toni Vorobyova in London; Editing by Geert De Clercq and Will Waterman)