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Italy Vote Uncertainty Weighs on Europe Shares

Uncertainty over the Italian election outcome dragged European indexes off their highs on concern that an unclear outcome could hamper the country's effort to implement economic reforms.

The pan-European FTSEurofirst 300 index provisionally closed up 0.1 percent at 1,166.73 points, off a high of 1,174.24 points. Italy's benchmark FTSE MIB equity index provisionally closed up 0.7 percent, having traded as much as 3.8 percent higher.

If no stable government is formed, voters could be forced to return to the polls, thereby fuelling short-term market volatility.

Kevin Lilley, European equity fund manager at Old Mutual Asset Managers, said he had sold off bank stocks in the run-up to the Italian vote and could sell more equities if the centre-right party headed by Silvio Berlusconi won the Senate.

"It will be 'risk-off' if Berlusconi wins. Italian bond yields will go up in the short-term," he said.

Toby Campbell-Gray, head of trading at Tavira Securities, said European equity markets would be choppy while the Italian situation remained unclear.

"The market's going to become a little bit more volatile until the conclusion of the vote," he said.

Voters in Italy headed to the polls on Sunday and finished voting on Monday at 2 p.m. London time.

The election race has been closely-fought with the main candidates Bersani and Berlusconi closely followed by Beppe Grillo's protest movement. Support for technocrat Mario Monti's "Civic Choice" party is thought to have slipped further in fourth place.

(Read More: The Tycoon, Professor and Clown in Italy's Election)

On Friday, Moody's downgraded the U.K.'s credit rating one notch from its prized AAA status to AA1 with a stable outlook. The credit ratings agency said the U.K.'s credit-worthiness remained "extremely high," but attributed the downgrade to weakness in the country's medium-term growth outlook and an increasing debt burden.

(Read More: Is the UK the New 'Problem Child' of Europe?)

Britain's treasury minister, George Osborne, said the downgrade would not change his austerity program that has been blamed for the country's weak growth outlook.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," Osborne said, after the Moody's downgrade.

Elsewhere, conservative candidate Nicos Anastasiades won the presidential election in Cyprus on Sunday by one of the widest margins in 30 years. Cyprus faces bankruptcy and Anastasiades will have to quickly finalize a financial rescue package with the euro zone and the International Monetary Fund, analysts say.