European stock markets closed up but off their highs after Italian Prime Minister Silvio Berlusconi lost his majority in parliament, stoking uncertainty further as the eurozone tries to resolve a deep-seated debt crisis.
Berlusconi won a technical vote on a 2010 budget report but lost his absolute majority in the process, sparking calls for him to resign immediately and dashing investor hopes for a clear-cut decision.
The vote came at the end of a day when borrowing costs for Italy, the eurozone's third largest economy and seen as in serious peril of falling victim to the debt crisis, soared to record highs.
Milan stocks rose more than 2.3 per cent earlier in the day on the view a Berlusconi resignation and a new government would spark a strong relief rally.
With the outlook suddenly clouded again, Milan finished up 0.74 per cent.
In London, the FTSE 100 index of top companies put on 1.03 per cent at 5,567.34 points.
In Paris, the CAC-40 rose 1.28 per cent at 3,143.30 points.
In Frankfurt, the DAX 30 added 0.55 per cent to 5,961.44 points, with both markets earlier showing gains of more than 2.0 per cent.
The euro came off highs above $US1.38 to trade at $US1.3787, up from $US1.3772 late on Monday, while the dollar fell to 77.77 from 78.06 yen.
Gold rose to $US1,795 an ounce from $US1,783.56.
In New York, stocks turned lower following the Italian vote.
The blue-chip Dow Jones Industrial Average was down 0.48 per cent in midday trading while the tech-heavy Nasdaq Composite lost 0.20 per cent.
"Given that corporate news has been inconsequential and no economic releases are scheduled for today, Europe remains the primary point of focus for market participants," Briefing.com analysts said.
While Greek political leaders bickered over forming a new government to implement the latest EU bailout, all eyes shifted to Rome as eurozone leaders expressed alarm at events in Italy which is saddled with a 1.9 trillion euros ($A2.53 trillion) debt mountain.
"The economic and financial situation of Italy is very worrying," EU Economic Affairs Commissioner Olli Rehn told a news conference after a meeting of European Union finance ministers in Brussels.
European Commission auditors will arrive in Rome late on Tuesday and start talks with officials on Wednesday to help the country implement budget cuts and economic reforms needed to restore market confidence, Rehn said.
"From our side the sooner the better because time is of the essence and Italy is facing very significant market pressure for the moment," he said.
Italian borrowing rates jumped after the vote, reflecting investor fears over the deepening political crisis, with the yield on 10-year bonds hitting 6.77 per cent - a level too high to be unsustainable for long.
The spread between Italian and German benchmark bond yields also widened sharply to around 5.0 percentage points, showing how investors were shunning Italy's bonds in favour of what they see as a safer investment.
The vote left Berlusconi's premier's centre-right coalition effectively with no mandate to pass the ambitious reforms demanded by the EU as absolutely necessary to stabilise Italy's public finances.
Italy's feeble growth prospects and its huge debt has left it wide open to market attacks as investors fear it may be the next victim of Europe's debt crisis despite its relatively low public deficit.
The day's events overshadowed some positive news from the banking sector as some of the major lenders reported sharp falls in bad-loan levels as they cleaned up their books and strengthened their capital position.
In Paris, Societe Generale jumped nearly 10 per cent at one stage after a significant cut in its Greek debt exposure cheered investors who also had to contend with its scrapping of the 2011 dividend and a "significant" cut to bonuses.
The shares finished the day up more than 7.0 per cent.
In London, Lloyds Banking Group shot up more than 7.0 per cent after it also cut its bad debt overhang and closed up with a gain of more than 4.0 per cent.
In Asian trade earlier on Tuesday, markets ended mixed, with Tokyo falling 1.27 per cent, Sydney up 0.48 per cent and Hong Kong closing flat.
AFP