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Italy Goes Down to the Wire as Nervous Investors Watch

Giuseppe Cacace | AFP | Getty Images

Two of the four front-runners in the Italian election are convicted criminals. Such is the state of politics in this highly-indebted country as Italians go to the polls this weekend to choose a new government.

Recent market action shows global investors are nervous about the outcome. Italy's stock market sold off sharply on Thursday and its interest rates have started to rise again. The reason: It is quite possible that no party wins a strong mandate—leading to an unstable government, paralyzed by infighting, and unable to fix Italy's finances.

Italy is the third most indebted country in the world after the United States and Japan, owing 1.9 trillion euros ($2.5 trillion).

If Rome doesn't continue to right its financial ship by cutting government spending and reforming the economy, so it can grow faster, lenders worry Italy will not generate enough tax revenue to pay back its debts—possibly leading to another round of financial chaos and contagion as we saw in 2010 and 2011 in Europe.

(Read More: Protest Vote in Italy Could Throw Up Big Surprise)

The leading candidate is Pier Luigi Bersani from the center-left Democratic Party, the largest in Italy.Recent polls show he could win 34 to 35 percent of the vote. But in order to govern in Italy, a party must reach 42.5 percent.

(All polling data is from early February. Italian law prohibits the release of polling numbers this close to the election.)

If Bersani wins, he'll have to form a coalition and choose from among the following individuals and their parties.

The Teflon politician of Italy, Silvio Berlusconi, who was the last elected prime minister until he was forced out in 2011, has made a remarkable comeback and is second in the polls.

(Read More: Silvio Berlusconi's 'Greatest' Hits)

As leader of the free-market, right-wing Freedom party, the media magnate looks to have 30 percent of the vote. That's despite a recent conviction and prison sentence (which he may never serve) for tax evasion and an investigation into whether he paid for sex with an underage prostitute--a Moroccan belly dancer with the stage name "Ruby the Heartstealer." Additionally, it is alleged he helped get her out of jail when she was arrested for stealing.

But as one of Italy's leading businessman (he's No. 169 on the Forbes global rich-list, worth $5.9 billion), Berlusconi is known for his incredibly deft political skills. He appeals to the strong anti-communist voting bloc that has long existed in Italy. It also helps that he controls a large chunk of the media.

The current Prime Minister Mario Monti, who was never actually elected but serves as a technocratic premier, is last in the polls as the leader of the Civic Choice party, garnering roughly 14 to 15 percent.

(Read More: Italy's Election: Tycoon, Clown or Professor)

He seems to get no credit from the Italian electorate for having stabilized Italy's interest rates at below 5 percent down from the crisis levels of 7 percent in 2011,when he took over after Berlusconi's dramatic downfall. He passed a number of measures quickly, in order to improve Italy's finances. But while he may be a skillful bureaucrat, even his allies acknowledge he is not a skillful politician.

Additionally, the population is deeply unhappy with the austerity measures he imposed, including higher taxes and much larger number of required working years before one can collect a pension. The business community complains Monti focused too much on raising taxes without decreasing the size and cost of government sufficiently.

Italian showman Beppe Grillo
Marcello Paternostro | AFP | Getty Images

The most startling newcomer and rising star is Giuseppe "Beppe" Grillo. A comedian who traverses the country in a camper, Grillo garners tens of thousands of Italians at his rallies, more than any of the other candidates. His obscenity laced rants bring cheers from the crowds.

(Read More: Italy Braces for Comedian's 'Unstoppable Epidemic')

His populist "Five-star Movement" is ranked third in the polls with 17 percent of the vote, but that is a dramatic rise compared to a year ago. Additionally, as 30 percent of the electorate is undecided, some Italian political analysts think he might garner enough undecided voters to push him into second place.

Grillo is the second candidate with a criminal conviction. In 1980 he was convicted of involuntary manslaughter for an auto accident in which 3 people died.

He recently told CNBC his party is "a movement of civility, of the future. It's a dream. It's a utopic realism. It's epidemic. You must see this movement like a virus."

(Read More: 'Girlfriend in a Coma' Film Shakes Up Italy)

Grillo also said, if his movement wins in the polls, he won't run for prime minister but will act instead as a guarantor and spokesman for the party.

The polls are open Sunday and until 3 p.m. on Monday (9 a.m. New York time.) Exit polls will start trickling in before the open on Monday, but whether or not there will be a stable government may not be answered for days.

—By CNBC's Michelle Caruso-Cabrera; Follow her on Twitter: @MCaruso_Cabrera