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 A day after polling ended, the election remained close as Italians awaited the final official results. European leaders pleaded with politicians in Italy to quickly build a government to continue to enact reforms to lower Italy's critically high debt and spare Europe another spike in its four-year financial crisis.
If Italian parties fail to form a governing coalition, new elections would be required, causing more uncertainty and a leadership vacuum.
"What is now decisive for Italy -- but, because Italy is such an important country for Europe, also for the whole of Europe
-- is that a stable government that is capable of acting can be formed as quickly as possible," German Foreign Minister Guido Westerwelle told reporters in Berlin.
The results of the election are a rejection of the tough austerity approach of the previous technocratic government led by Mario Monti. A center-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament, while the Senate looks split with no party in control.
Italy's FTSE MIB index was trading 4.7 percent lower at 15,586, having earlier been nearly 5 percent down at one point Tuesday. Some of its banking stocks were briefly suspended after precipitous falls at the bell.
The interest rate on the country's benchmark 10-year bond -- an important gauge of investor sentiment
-- rose by 0.25 percent to 4.74 percent. Investors sought protection in the bonds of more stable and prosperous economies, and the interest rate on Germany's 10-year bonds fell 0.10 percent to 1.47 percent.
Silvio Berlusconi, the former Italian premier whose center-right coalition did better than expected, insisted that a government can be formed and called on Italians to ignore the "crazy markets." Berlusconi is a key player as his coalition is now the second-biggest bloc in the upper chamber.
''Markets go their own way. They are independent and also a little crazy," he said, adding that a government can be cobbled together if rival politicians are willing to "make some sacrifices."
There were some indications that he could be right: An Italian treasury bond sale totaling
euro8.75 billion ($11.75 million) sold out Tuesday morning despite higher rates.
But stock indexes across Europe were trading sharply lower, though above the lows they hit in the first hour of trading. Germany's DAX was down 1.8 percent at 7,636 while the CAC-40 in France fell 2.2 percent to 3,639. The FTSE 100 index of leading British shares was 1.3 percent lower at 6,271.
Italy is hugely important for the future of the euro, and its apparent stability over the past six months has been one of the reasons that concerns over the currency have eased. Of the 17 European Union countries that use the euro, Italy has the second-highest debt burden as a proportion of its gross domestic product, at 127 percent. Only Greece's is higher. Italy has to spend around
euro80 billion a year just to service its debt.
The Monti government enacted wide-ranging reforms to the budget and the economy. Though its borrowing rates have fallen in financial markets, the cost to Italians has been high, with the country mired in an 18-month recession and unemployment on the rise.
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 Monti was a big loser in the election and Berlusconi ruled out an alliance with his successor, whom he blamed for driving Italy deeper into recession.
The worry across Europe, and in financial markets everywhere, is that Italy's appetite for reform may wane and its debt situation may deteriorate.
Though Italy's annual borrowing -- its budget deficit -- is relatively small compared with other euro countries at 3 percent of its annual gross domestic product, its overall debt stands at a colossal
euro2 trillion.
Last July, concerns over the country's ability to pay down its debt -- despite the Monti reforms
-- and the stability of the wider eurozone sent the interest rate on its 10-year bonds back up to a near-unsustainable 6.36 percent. This prompted European Central Bank chief Mario Draghi to offer to buy up unlimited quantities of short-term debt in countries struggling with high borrowing costs.
The surprise factor in Sunday and Monday's election was the number of votes for comic-turned-political leader Beppe Grillo, whose 5 Star Movement capitalized on a wave of voter disgust with the ruling political class.
In Spain, another country struggling with austerity, ministers expressed concern over the Italian election results but were confident they won't upset plans to lift Europe out of the crisis.
Foreign Minister Jose Manuel Garcia-Margallo said the result was "a jump to nowhere with positive consequences for nobody."
The euro was hit hard late Monday on the initial fallout of the election results, nearly dropping below $1.30 for the first time since early 2013. However, it recovered Tuesday, trading 0.1 percent higher at $1.3087.
Wall Street was poised for a steady opening, a day after the main U.S. indexes had their worst session since last November. Dow futures and the broader S&P 500 futures were up 0.2 percent.
Earlier in Asia, Japan's Nikkei slid 2.3 percent to 11,398.81 as the yen appreciated to the potential detriment of the country's exporters. The dollar was 0.4 percent lower at $92.23 yen. Hong Kong's Hang Seng dropped 1.3 percent to 22,519.69 while South Korea's Kospi fell 0.5 percent to 2,000.01.
Oil prices took a hit too, with the benchmark New York rate 64 cents lower at $92.47 a barrel.
"Clearly markets are taking fright from the messy and chaotic Italian election result," said Louise Cooper, financial analyst at CooperCity.
[Associated
Press; By PAN PYLAS and FRANCES D'EMILIO]
Pylas reported from
London.
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