Italy gridlock deepens as Europe watches nervously

Italy's political gridlock deepened as a spat between the main leftist party and a new anti-establishment movement hit prospects for a new government, after elections that have spooked Europe. Comedian turned populist firebrand Beppe Grillo said his Five Star Movement (M5S) would not endorse the Democratic Party (PD), which won the most votes in the election earlier this week, but not enough to form a majority in parliament. "The M5S is not going to give a vote of confidence to the Democratic Party or to anyone else," Grillo, who has channelled the frustrations of austerity-weary Italians, wrote on his blog Wednesday. The comment appeared to be a rejection of overtures from the PD, which on Tuesday suggested working with M5S on key measures such as slashing government costs and helping Italy's poorest through a grinding recession. Grillo said the PD had made a series of "indecent proposals". PD leader Pier Luigi Bersani retorted with a statement saying: "If Grillo has something to say to me, including the insults, I want to hear it in parliament." Grillo, who has called for a referendum on the euro and won a quarter of the vote in parliament, suggested the PD could ally with Silvio Berlusconi's centre-right coalition for a short-term before new elections. The scandal-tainted Berlusconi, dismissed as a spent force just months ago after 20 years in politics, came an extremely close second to the centre-left, ahead of the Five Star Movement. The three-time prime minister and billionaire tycoon said in a video message that waiting until the new parliament is due to meet on March 15 to begin talks on forming a coalition government was too long. Berlusconi has promised to refund an unpopular property tax -- if necessary out of his own pocket -- and has blamed a "hegemonic" Germany for many of Italy's current economic woes. After initial market panic on Tuesday, investors were more measured on Wednesday, especially after a better-than-expected bond auction in Rome. European capitals remained nervous however amid fears Italy could turn back the clock on reforms following an election that has been seen as crucial for the future of the eurozone. Italian President Giorgio Napolitano cancelled planned talks with the man bidding to unseat German Chancellor Angela Merkel, Peer Steinbrueck, after he referred to both Berlusconi and Grillo as "clowns". Commenting on the inconclusive vote in Italy, Steinbrueck said late Tuesday he was "downright appalled that two clowns won" -- a reference to the two political leaders' strong showing in the election. Steinbrueck's spokesman Michael Donnermeyer confirmed to AFP that Napolitano had cancelled the meeting because of the comments. In comments published in Thursday's Bild newspaper Napolitano said: "Peer Steinbrueck explained to me by phone that he had not meant to be offensive. But in my view a meeting was no longer possible after the remarks he made." German politicians have urged Italy to stick with the reform programme pursued by outgoing Prime Minister Mario Monti, which, while unpopular in Italy, did improve confidence in the financial markets. Monti was the big election loser, taking just 10.56 percent in the lower house, the Chamber of Deputies. Bersani has already said that the huge anti-austerity protest vote should be heeded beyond Italy's borders. In his first speech following the vote, Bersani said on Tuesday: "The bell tolls also for Europe." Moody's credit ratings agency meanwhile warned it might downgrade Italy, saying the vote result "increases the risk of political paralysis and prolongs political uncertainty. "This week's elections have implications well beyond Italy itself and are, indirectly, credit-negative for other pressured euro area sovereigns," it added. The PD-led coalition took the lower house of parliament but no party won a majority in the upper house and support in both chambers is needed in order for a government to be formed. The current government stays in place until then. Analysts have acknowledged that a minority centre-left government reliant on votes from other parties in the Senate on a case-by-case basis could be formed, but describe the situation as "highly unstable". Leading Italian bank Intesa Sanpaolo warned the suspense -- and the political uncertainly -- could last for weeks. Italy is enduring its longest recession in 20 years and unemployment rates are at record highs. Later Wednesday, in the currency markets in New York, the euro recovered against the dollar after the successful Italian debt auction reassured markets. Italian treasury had sold 6.5 billion euros of treasury bonds. However Christopher Vecchio, currency analyst at DailyFX, cautioned that the 10-year bonds were sold at an average yield of 4.83 percent compared with 4.17 percent at the previous auction on January 30.