In an earthquake result, the Five Star protest movement of comedian Beppe Grillo looked likely to emerge as the biggest single party in the lower house. The scourge of bankers and corrupt elites, Mr Grillo has campaigned for a return to the lira and a restructuring of Italy’s €1.9 trillion (£1.64 trillion) public debt.
The conservative bloc of ex-premier Silvio Berlusconi looked poised to win the senate, coming back from the political grave with vows to rip up the EU’s austerity plans and push through tax cuts to pull Italy out of deep slump.
“The majority of Italians have clearly voted against the Brussels consensus. That is a damning indictment,” said Mats Persson from Open Europe.
A euphoric rally on European bond and stock markets early on Monday gave way to abrupt selling as it became clear that Italy would be left with a hung parliament and no consensus over fundamental policies, leaving the country almost ungovernable.
The yield spread of 10-year Italian bonds over German Bunds jumped 30 basis points to 290 in late trading. The MIB index of stocks in Milan saw a rollercoaster day, while the euro gave up its early gains against the dollar.
The centre-Left Democrats of Pier Luigi Bersani won the most votes on the popular count with pledges to stay the course on EU crisis strategy, but fell short of seats under Italy’s complicated electoral system. He cannot pass legislation without the backing in both houses.
His economic spokesman, Stefano Fassina, said the result pointed to paralysis, and might force a second election. “The projections so far suggest there will be no stable government.”
It is unclear whether the European Central Bank (ECB) can continue to stand behind the Italian debt market under its Outright Monetary Transactions (OMT) scheme if there is no party able to deliver on austerity cuts and reforms demanded by Berlin and Brussels.
“People have forgotten that the OMT cannot be triggered without a vote in the German Bundestag. This is going to be a huge problem, and we may be back to the political stand-off between the North and South of Europe,” said Mr Persson.
Giuseppe Ragusa, from Luiss Guido Carli University in Rome, said there would be huge pressure to include outgoing premier Mario Monti in any new configuration to reassure markets and create a fig-leaf of continuity to keep the ECB on board, even though Mr Monti himself suffered a serious defeat.
His Civic List won just 9pc of the vote in what amounted to a popular rejection of his hair-shirt policies. “It is a disaster for Monti, calling into question every thing he has done. He must regret that he ever got drawn into politics,” said Gary Jenkins from Swordfish.
Mr Monti took power 15 months ago at the head of a technocrat team after Mr Berlusconi was forced from office in murky circumstances.
Mr Berlusconi, Italy’s richest man, alleges that he was the victim a “coup d’etat” orchestrated by EU officials and German political leaders, and has made no secret of his thirst for revenge.
“This election is close to being the worst-case scenario for the markets. If there is one wild card in the European pack willing to do anything, it is Silvio Berlusconi, and he is sitting on the biggest barrel of gunpowder in Europe,” said Mr Jenkins.
“Italy is big enough to blow up the whole eurozone. That means Italy’s leader can take a tough line in the pyschological game with Germany. The question is what markets will do. The Italian debt auction on Wednesday will be very interesting to watch.”
Analysts say that even if Mr Bersani is able to put together a government, he cannot ignore the anti-establishment message of the election. “His own party is very divided. He has his own faction that wants to let up on austerity and stand up to chancellor Angel Merkel,” said Prof Ragusa.
The reforms carried out by Mr Monti have covered the “low-hanging fruit” only, with the more difficult tasks still ahead. “I don’t see any solution if there is a hung parliament,” he said.
Analysts say Italy is in a state of popular revulsion, unwilling to accept further retrenchment after suffering six years of austerity and cutbacks. Disposable income fell 4pc last year alone, according to IHS Global Insight.
Mr Monti pushed through draconian fiscal tightening – mostly tax increases – to comply with EU demands, even though Italy’s primary budget was already near balance. Critics say this tipped the economy into needlessly deep recession,Output contracted by 2.1pc last year, and is expected to fall 1.4pc this year. The economy will have shrunk by almost a tenth from its peak by 2014. The youth jobless rate has reached 37pc. By any measure, it has become a depression.