EUROPE MARKETS: Italian Jitters Send European Stocks Lower

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Heavy selling in Italian equities hurt sentiment across European markets on Wednesday, as renewed popularity for former Prime Minister Silvio Berlusconi stoked fears of financial chaos in his country.

Investors also stayed on the sidelines ahead of the European Central Bank's monetary policy meeting on Thursday.

The Stoxx Europe 600 index lost 0.6% to 283.83, after putting in the best daily performance since early January on Tuesday.

"There are clearly concerns that Berlusconi is going to be a big player in the election and markets are worried that it would be perceived as bad for the Italian economy," said Peter Dixon, strategist at Commerzbank.

"There is certainly a risk that he will end austerity measures and I think the market will view that as a negative. Investors are starting to display that nervousness and it's likely to continue until the election," he added.

The FTSE MIB stock index slumped 1.2% to 16,508.40, with shares of UniCredit SpA down 2.4% and Intesa Sanpaolo SpA off 2.1%.

On Monday, the Italian benchmark sank 4.5%, after Berlusconi vowed to reduce taxes if his coalition wins the Feb. 24-25 elections, fueling concerns that the country will diverge from its current reformist drive.

The former prime minister in recent polls narrowed the gap with front-runner Pier Luigi Bersani to just 3.7 percentage points, Bloomberg News reported, citing a daily tracking poll by Tecne institute for SkyTG24. In early January, Tecne has Bersani leading with 14 percentage points.

Other polls, however, showed larger gaps in the range of 5.5 to 8 percentage points.

On Thursday, attention turns to the European Central Bank's monthly policy decision. The central bank is widely expected to keep rates on hold and refrain from introducing new measures.

Japanese inspiration

European stock markets had earlier traded in positive territory, taking inspiration from an upbeat mood in Asia. Japanese stocks surged to a level not seen since September 2008, as the yen sank amid hopes of aggressive easing measures following news of Bank of Japan Gov. Masaaki Shirakawa's early departure.

"This opens up the spot for a new governor who will be more committed to implementing the Bank of Japan's new 2% inflation target than Shirakawa seems to be. Market participants are now pricing an even easier monetary policy stance from the Bank of Japan," the Danske Bank analysts said.

"The expectation of easier monetary policy in Japan, the U.S. and the U.K. certainly helps sentiment as does general optimism about the state of the global economy," they added.

U.S. stocks opened lower on Wall Street.

Back in Europe, shares of Elan Corp. PLC slid 4.2%, after the biotech firm said Biogen Idec Inc. (BIIB) will pay $3.25 billion to gain full ownership and control of the multiple-sclerosis drug Tysabri.

Shares of Hargreaves Lansdown PLC jumped 10%. The investment manager reported a 30% rise in pretax profit for the first half and raised dividends to 6.3 pence (9.87 cents) from 5.1 pence.

On a more downbeat note, shares of Royal KPN NV lost 5.5% after Bank of America Merrill Lynch cut the Dutch telecom firm to underperform from buy. The shares slumped 16% on Tuesday, after the firm said it would raise 4 billion euros ($5.4 billion) in a rights issue to cut debt.

In France, shares of ArcelorMittal SA gained 1.6%, after the steelmaker said its loss widened in the fourth quarter but it sees profitability picking up in 2013.

The CAC 40 index , however, dropped 1.8% to 3,628.85. Shares of Vinci SA gave up 3.8%, after the construction firm reported a slight rise in 2012 profit, but said it sees a difficult economic climate in 2013.

Banks posted steep losses, with Société Générale SA down 4.1% and BNP Paribas SA (FR) 3.1% lower.

And in the U.K., shares of Royal Bank of Scotland Group PLC (RBS) picked up 0.4%. The U.S. Commodity Futures Trading Commission ordered the bank to pay a $325 million fine to settle charges of manipulation and attempted manipulation of the London interbank offered rate.

Mining firms were also on the rise in London, as metals prices traded mixed. Rio Tinto PLC (RIO) gained 0.8% and BHP Billiton PLC (BHP) added 0.5%.

The U.K.'s FTSE 100 index slipped 0.1% to 6,277.40.

Germany's DAX 30 index fell 1.4% at 7,559.50, with shares of Commerzbank AG down 2.4%.

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