World markets have been rocked after elections in Italy seen as crucial for the eurozone ended in deadlock.
No group emerged as a clear winner after the vote, which saw a populist anti-austerity party make a stunning debut.
The Italian stock market in Milan fell 5% on opening and state borrowing costs rose as investors took fright at the political stalemate.
At the close of trading on Tuesday the FTSE 100 was down 1.34%, Italy's MIB 4.89% lower, Spain's Ibex off 3.2%, Germany's Dax down 2.27% and France's Cac reduced by 2.67%.
Banking stocks were particularly badly hit with the Royal Bank of Scotland and Barclays the biggest fallers on the FTSE 100, losing more than 4% of value.
The euro also fell to an almost seven-week low against the dollar in Asia on fears about the eurozone debt crisis, down as far as \$1.3042, its lowest since January 10.
While other European stock markets, including the FTSE 100 in London, saw falls greater than 1% the Dow Jones opened positively on Wall Street following a 1.6% loss on Monday.
The market reaction reflects concerns that the election result could spark a new crisis in Italy, which has the eurozone's third largest economy.
There are fears it will jeopardise tough reforms required to heal its economic woes and prevent a new round of global financial turmoil.
The centre-left block of Pier Luigi Bersani will have a majority in the lower house thanks to a premium of seats given to the largest block in the chamber.
In the upper house, the Senate, seats are awarded on a region-by-region basis. Here, the centre-left looks set to end up with around 119, compared to 117 for the centre-right but 158 are needed for a majority to govern.
Any coalition government that may be formed must have a working majority in both houses to pass legislation, which means Italy is now in a state of limbo with a hung parliament that is unprecedented in its post-war history.
"It is clear to everyone that this is a very delicate situation for the country," Mr Luigi Bersani said.
Former prime minister Silvio Berlusconi has already indicated his centre-right could be open to a grand coalition with the centre-left under Mr Bersani but he wants a recount for the Senate vote.
"Italy cannot be left ungoverned, we have to reflect," he said, describing the market reaction as "a bity crazy" and saying all sides had to "sacrifice something" if the impasse was to be broken.
An ally of conservative German Chancellor Angela Merkel urged Italy to stick with reforms pursued by the outgoing technocratic emergency government of Mario Monti.
But the poor showing by Mr Monti's centrist bloc, which took just 10.6%, showed a weariness with austerity that was exploited by both Mr Berlusconi and comic Beppe Grillo.
The latter's anti-establishment 5-Star Movement won more votes than any other party, taking 25% nationally.
In just three years, the 5-Star Movement - heavily backed by a frustrated generation of young Italians increasingly shut out from permanent full-time jobs - has grown from a marginal group to one of the most talked about political forces in Europe.
Comparing single parties without coalitions, it is now the biggest party in the lower house with 25.55% to the Democratic Party's 25.41% - a shock success that analysts predicted would reverberate around an austerity-weary Europe.
"The 'non-party' has become the largest party in the country," said Massimo Giannini, commentator for the Rome newspaper La Repubblica about Grillo, who mixes fierce attacks on corruption with policies ranging from clean energy to free Internet.
"This is fantastic! We will be an extraordinary force!" Mr Grillo said on his website, warning mainstream politicians they would "only last a few more months".
"We'll have 110 people in parliament and we'll be millions outside."
Mr Monti said: "It's not that surprising if you consider how much people were let down by politics in its traditional forms."
Some Democratic Party officials suggested fresh elections may have to be held within a few months after a reform of Italy's complex electoral laws. Others said some form of agreement could be found with the anti-austerity 5-Star Movement.
Political analysts suggested a possible return to the grand coalition agreement between right and left seen over the past 18 months, or even dissolving the Senate alone to hold fresh elections for only one chamber of parliament.