REUTERS SUMMIT-Italy vote raises risk of euro contagion-Schaeuble
(For other news from Reuters Euro Zone Summit, click on http://www.reuters.com/summit/Eurozone13)
* German minister urges swift formation of govt in Italy
* Schaeuble says crisis not over, setbacks inevitable
* Russia understands it must be part of Cyprus solution
* Schaeuble sees broad-based economic recovery at home
BERLIN, Feb 27 (Reuters) - German Finance Minister Wolfgang Schaeuble said on Wednesday that Italy's inconclusive weekend election had raised the risk of market turmoil spreading to other euro countries and urged Italian politicians to form a stable government quickly.
Speaking to Reuters from the finance ministry in Berlin as Italy's borrowing costs hit their highest level in four months, Schaeuble said it was too early to declare the euro crisis solved.
"The election result in Italy has sparked doubts in the market that a stable government can be formed. When such doubts arise there is a danger of contagion. We saw this last year when elections in Greece led to political uncertainty. Other countries are then infected," Schaeuble said.
Yields on benchmark 10-year Italian government bonds hit 4.9 percent in the wake of the election. This was well below 2011 crisis highs of 7.3 percent but sharply higher than the 4.1 percent level at which they traded last month.
"Now it is up to those who were elected in Italy on Sunday to form a stable government. The faster they do this, the quicker the uncertainty will be overcome," Schaeuble added.
"And by the way, I never said the euro crisis was over. I only said that we have made significant progress. We need to continue on this path, but we will have setbacks."
No party won an overall parliamentary majority in Italy's vote, rattling investors in the euro zone's third largest economy and rekindling concerns that the bloc's three-year old crisis could intensify after several months of relative calm.
On Wednesday, solid demand at an Italian government debt auction brought some relief, pushing European shares and the euro higher. But there were also signs that foreign investors had stayed away from the bond sale.
Schaeuble, 70, has played an important role in shaping Germany's response to the crisis, pushing the idea that southern euro states must consolidate their budgets and reduce debt in order to win back market confidence.
The course has led to much economic pain in countries like Greece, Spain and Portugal, where unemployment has shot higher and living standards have fallen.
Speaking to Reuters on Tuesday, Schaeuble's French counterpart Pierre Moscovici said the Italian vote, which delivered strong scores for former premier Silvio Berlusconi and upstart comic-turned-politician Beppe Grillo, showed austerity had gone far enough.
But Schaeuble stated that he saw stable finances as a condition for growth and said France needed to introduce structural reforms of its own to boost growth.
FRANCE MUST DO MORE
"France must also do more here," Schaeuble said. "(French President Francois) Hollande knows this and so does Pierre Moscovici."
Turning to the Mediterranean island of Cyprus, which is in talks with European officials on a bailout for its banks, Schaeuble said he hoped for an agreement before Easter, which falls at the end of March.
He made clear that Russia must make a contribution, although he declined to address speculation that European officials may seek to "bail in" Russian depositers by forcing them to take losses on their holdings.
"Russia is involved because Russia made a not-insignificant loan to Cyprus and also because Russian investors have a very high level of deposits in Cyprus," he said.
He struck a positive note on the German economy, which contracted by 0.6 percent in the fourth quarter of 2012 as exports to euro zone partners dried up, suggesting Germany could tolerate another year of solid wage rises.
The country's IG Metall union said on Wednesday it would seek salary hikes of up to 5.5 percent this year for its 3.7 million workers in the metal-working and electrical sectors.
"We had a weak fourth quarter last year, but all signs are now pointing to a broad-based recovery in Germany," Schaeuble said.
"We will need to cultivate this, not only the politicians but also those negotiating wages," he added, saying that a narrowing of labour cost differentials between Germany and southern euro countries would bring stability to the single currency bloc.
(Additional reporting by Gernot Heller; Writing by Noah Barkin, Editing by Michael Stott)