Milan - Hopes of an end to two months of political deadlock in Italy drove its financial markets higher on Monday after the re-election of 87-year-old Giorgio Napolitano suggested parties may be nearer a deal to form a government.
Napolitano, elected after days of squabbling thanks to a broad agreement between some of Italy's main political groups, had earlier made clear that he favoured a new government over potentially destabilising new elections.
An inconclusive vote in February that split the parliament between three litigious parties left the eurozone's third-largest economy in limbo as it struggles to escape a deep recession.
Irate businessmen have been urging politicians to overcome divisions and take action to stem a wave of bankruptcies and spiralling unemployment.
"The markets are rallying because the new mandate to Napolitano averts the risk of snap elections and paves the way for a government backed by some of the major parties," said a Milan-based trader.
Italy's main stock market index, the FTSE MIB, was up 1.8% at 11:06, outperforming gains in Paris, London and Frankfurt. Italian stocks accounted for more than half of the top gainers on the leading pan-European stock index , led by a 4% gain for insurer Generali .
Yields on Italy's benchmark 10-year BTP fell to just above 4%, a level not seen since late January.
Broad coalition?
Napolitano, the first president in Italy's history to be re-elected for a second term, will spell out his strategy later on Monday.
A source in the presidential palace told Reuters Napolitano could either hold a quick round of consultations starting on Tuesday or skip them altogether because he has already sounded out party leaders officially twice since the deadlock began.
Italian newspaper said Giuliano Amato, a former prime minister, was likely to be asked to form a new government.
"Given the strong support behind Napolitano's re-election, it is likely that a grand coalition government will find support too," Credit Suisse said in a note to clients.
An agreement of Italy's centre-right and centre-left blocs, with the addition of the small centrist contingent of Mario Monti, led to the choice of Napolitano on Saturday.
The anti-establishment 5-Star-Movement of former comedian Beppe Grillo had supported leftist academic Stefano Rodota and branded the choice of Napolitano as a desperate attempt by traditional parties to cling to power.
"A broad political coalition does not currently represent a huge risk factor for Italy: the country has a limited budget deficit and does not need a budgetary correction," said Alessandro Giansanti, a strategist with ING.
"Now the focus will be on pro-growth policies, rather than on austerity."