* Polling stations close at 1400 GMT
* Markets could move on exit poll results after that
* Inconclusive result could cause market sell-off
By Lisa Jucca
MILAN, Feb 25 Investors are awaiting the outcome
a wide open Italian election that could trigger a sell-off in
stocks and bonds and renew concerns about the euro if the polls
bring an unstable government.
Polling stations open for a second and final day on Monday
and exit polls will be published soon after they close at 3 p.m.
Opinion polls have suggested the centre-left Democratic
Party (PD) of Pierluigi Bersani could secure a narrow victory in
the recession-hit country, the euro zone's third-largest
But the rise of anti-establishment comedian Beppe Grillo's
5-Star Movement and the impressive comeback of centre-right
leader Silvio Berlusconi have cast doubt over Bersani's ability
to govern even if he forms a coalition with the centrist party
of outgoing technocrat Prime Minister Mario Monti.
Exit polls soon after 1400 GMT could spark an initial market
reaction although a clear political picture may emerge well
after market close. Official results are expected by early
"If we don't have an indication of clear winner, there will
be pressure on Italian bond yields," said Ishaq Siddiqi, market
strategist with trading house ETX Capital who said markets were
expecting a Bersani win.
"If this is confirmed, there should be a short-lived
positive reaction and the euro should go up," he said.
"But next immediate question for the market will be how
viable the winning coalition will be and whether it is able to
continue with much-needed reforms."
Italian stocks, which had remained mostly stable in the last
two weeks before the vote, lost ground on Thursday on concerns
that the rise of Berlusconi and Grillo would make it more
difficult for PD to secure a majority.
A debt auction scheduled for 1000 GMT on Monday could give
an early indication of whether nervousness is prevailing. Italy
is selling up to 4.25 billion euros in two-year zero-coupon
bonds and inflation-linked BTPei bonds.
This, and the sale of six-month BOTs on Tuesday, should be a
relatively safe play for the Italian Treasury ahead of a more
challenging auction on Wednesday of 10-year bonds, which have
been sold off by some foreign investors ahead of the elections.
"Most investors adjusted positions on Italy's debt two weeks
ago and now they are sitting on the fence, waiting for the
outcome of the election," said Luca Cazzulani at UniCredit.
"On Monday we could see volatility and the market may react
to rumours on the polls ... The volatility may imply somewhat
higher rates for Rome relative to most recent auctions, but I do
not see difficulties on the demand."
The yield gap between 10-year Italian and German bonds stood
at around 288 basis points on Friday, nearly half levels seen in
late 2011, when Monti was called in to bring Italy back from the
brink of a possible default that would have sunk the euro zone.
But Italian borrowing costs are still far too high, Italian
bankers and businesses say.
"We need political stability and lower bond spreads," said
UniCredit boss Federico Ghizzoni. "At 270, 280, 290
basis points the spread is unsustainable. Either it goes down or
it creates serious problems for the Italian economy."
Analysts say 10-year bond yields, now at around 4.40 percent
could drop to 4 percent if the vote delivers a stable
government, but would rise towards 4.75-4.90 if results are
The European Commission is forecasting Italy's economy to
shrink by 1 percent in 2013, worst than previously expected and
a painful reminder of the challenges awaiting Monti's successor.
"Foreign investors fear government instability in Italy or a
fragmented government," said a senior Italian banker. "If this
is the case, we could see a lot of market volatility."
Many Italians are already expecting a new general election
should the new government turn out to be a very weak one.
"Our base case is for a weak Bersani-plus-Monti coalition
potentially needing to be enlarged to take in other minor
parties," said Antonio Guglielmi, an analyst with Mediobanca.
"This would clearly not generate a strong government."
(Additional reporting by Francesca Landini; Editing by Robin