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Update: Anti-establishment surge unsettles investors in Italy

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Update: Anti-establishment surge unsettles investors in Italy

Italian stocks and government bonds fell after the populist Five-Star movement came first in Italian elections, delivering a likely majority for parties with a history of anti-European Union rhetoric but also opening the way for uncertain coalition talks.

Five-Star, founded as an online movement by comedian Beppe Grillo but now fronted by 31-year-old university dropout Luigi Di Maio, won 32.6% of the vote for the lower house of parliament, ahead of the center-left Democratic Party on 18.7% and the far-right Northern League on 17.4%, early Interior Ministry data showed.

Five-Star was set to win about 231 seats in the 630 seat lower house, according to political consultancy Quorum. While the party has previously said it will not form a coalition, Di Maio has indicated he is prepared to speak to any potential partner. Five-Star shares eurosceptic views with the Northern League, which was heading for 123 seats. Former Prime Minister Silvio Berlusconi's Forza Italia could take 99 seats.

The FTSE MIB Index of Italian shares slid as much as 2.1% before retracing losses to close down 0.4%, on a day when other European bourses rose. The yield on 10-year Italian government bonds rose 3 basis points to 2.003%, after earlier hitting as high as 2.035%. The euro was little changed at $1.2328 at 6:46 pm in Milan after the news, which came after German Chancellor Angela Merkel secured backing from the Social Democratic Party for a fourth term in office March 4.

The German news partly offset the Italian election results, helping to buoy the euro, ING analysts said in a research note. The new Italian government should not knock eurozone economic reform, championed by French President Emmanuel Macron with support from Merkel, off course, they said.

"The new German government should cautiously and slowly push forward with European and eurozone integration," ING said.

Parliament will meet March 23 and formal talks on forming a government are likely to start in early April.

"Italy's latest vote count appears to confirm exit polls of an indecisive outcome," UBS analyst Matteo Ramenghi said in a note in which he anticipated volatility in Italian assets, particularly stocks. "No party or coalition will have sufficient votes to form a government, paving the way for a grand coalition, or repeat elections."

He added: "A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline. Repeat elections could prolong uncertainty and weigh on Italian assets.

"An anti-establishment alliance of M5S and Lega, the worst-case scenario for markets, looks unlikely due to different programs."