STOCK markets and southern European government bonds sank on Tuesday on fears that an electoral stalemate in Italy would leave its economic reform efforts in tatters and reignite the euro zone's broader debt crisis.
Italian shares lost as much as 5 percent of their value while 10-year bond yields saw the biggest jump in percentage terms this year after polls showed no single political force would have a majority in Italy's two houses of parliament.
A rally at the start of 2013 had encouraged hopes among policymakers that the euro zone was past the worst, but a steady flow of bleak news on its major economies has already undermined that faith.
Italy and Spain's ability to change the shape of their economies, get growth going and debt down have been at the heart of the euro zone's troubles for more than a year; the euro hit its lowest since the start of January against the dollar and stock markets in Germany and France fell by 2-3pc, the most in almost a month.
"It looks like a mess to be honest with you, it doesn't look like we've got a workable government and the market is quite rightly on the defensive on this type of news," said Stewart Richardson, chief investment officer at RMG.
Yields on 10-year Italian government bonds rose by as much as half a percentage point to 4.86pc in morning trade and the cost of insuring its debt against default surged by 45 basis points.
Some fund managers, however, were yet to be convinced that the election represented a major game changer for the euro zone and Italy as a whole.
"For the credit risk of Italy it doesn't change a thing for me. They will probably work out a weak coalition but it is not really endangering the credit standing of Italy," said Didier Duret, Chief Investment Officer at ABN Amro.
London's FTSE 100 was down 1.35pc, while Paris's CAC-40 and Frankfurt's DAX down as much as 2pc. The pan-European FTSEurofirst 300 index was down 1pc.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9pc sending the MSCI world equity index down 0.7pc to 349 points.