Italian election result hangs in the balance

The upstart protest campaign of comic-turned-politician Beppe Grillo was also showing a stunningly strong result in both houses of the legislature, confirming its surprise role as a force in Italian politics.

The unfolding murky result raised the possibility of new elections in the coming months and bodes badly for the nation's efforts to pass the tough reforms it needs to snuff out its economic crisis.

After surging in the wake of exit polls, Milan's main stock index slumped with first projections before closing up slightly.

The Italian election has been one of the most fluid in the last two decades thanks to the emergence of Mr Grillo's 5 Star Movement, which has capitalised on a wave of voter disgust with the ruling political class and harsh austerity measures imposed by technocrat premier Mario Monti - who has fared miserably in the elections.

The decisions Italy's government makes over the next several months promise to have a deep impact on whether Europe can decisively stem its financial crisis.

As the eurozone's third-largest economy, its problems can rattle market confidence in the whole group and analysts have worried it could fall back into old spending habits.

Mr Bersani's coalition - which has shown a pragmatic streak in supporting the tough economic reforms spearheaded by Mr Monti - has taken 35.5% of the vote for the lower house of parliament, ahead of the centre-right coalition under Mr Berlusconi with 29%, exit polls indicated.

The poll by Tecne has a margin of error of plus or minus 2.5%.

In the Senate, projections by the Piepoli Institute for RAI public TV showed Mr Berlusconi's coalition slightly ahead with 31% to Mr Bersani's 30%.

Mr Grillo's movement had 24.6% and Mr Monti's centrist forces 9.4%. Sky's Senate projections showed Mr Berlusconi with a two-point lead over Mr Bersani, and Mr Grillo with 25%.

Mr Bersani's party would have to win both houses to form a stable government, and given the uncertainty of possible alliances, a clear picture of prospects for a new Italian government could take days.

It is all but impossible that he would team up in a "grand coalition" with his arch-enemy Mr Berlusconi.

Mr Bersani, a former communist, has reform credential as the architect of a series of liberalisation measures and has shown a willingness to join Mr Monti, if necessary, to form a stable government.

But he could be hamstrung by the more left-wing of his party. And Mr Grillo's stunning surge shows Italians are fed up with painful economic cures.

Under Italy's complex electoral law, how the upper chamber's seats are divvied up depends on how the candidates do in Italy's regions, since the more populous regions, like Lombardy, get a greater share of the seats.

Whether the centre-left takes Lombardy might well decide if the coalition could stitch together a coalition with a workable majority in the Senate, as well as in the lower Chamber of Deputies, where the regional factor does not exist.

Mr Berlusconi, who was forced from office in November 2011 by the debt crisis, has sought to close the gap by promising to reimburse an unpopular tax - a tactic that brought him within a hair's breadth of winning the 2006 election.

Mr Monti, respected abroad for his measures that helped stave off Italy's debt crisis, has widely been blamed for financial suffering caused by austerity cuts.

Mr Grillo's forces are the greatest unknown. His protest movement against the entrenched political class has gained in strength following a series of corporate scandals that only seemed to confirm the worst about Italy's establishment.

If his self-styled political "tsunami" sweeps into parliament with a big chunk of seats, Italy could be in store for a prolonged period of political confusion that would spook the markets.

He himself will not hold any office, due to a manslaughter conviction.