Wall Street drops on Italian election uncertainty

NEW YORK (Reuters) - Stocks fell on Monday, reversing course from earlier gains as elections in Italy stoked concerns a divided parliament could disrupt the country's fiscal reforms and the euro zone's stability.

Early forecasts of the results were conflicting, as opinion polls indicated the center-left of Pier Luigi Bersani winning the lower house, but projections from RAI state television showed Silvio Berlusconi's center right in front in the Senate - which has equal lawmaking power - but unable to form a majority.

The resulting gridlock in parliament could force new elections and sent the euro currency lower against both the dollar and yen.

"Most likely we are looking at a second election, so it's delayed, but at the margin it is a negative," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.

"The question is, what happens with Italy and that uncertainty is out there, that is really what you've seen in the sell-off here."

Earlier polls pointing to a center-left victory boosted stocks in Milan and other European markets, as well as helping to lift the S&P 500 to a session high of 1,525.84 on optimism Italy would continue to pay down its debt.

However, the benchmark S&P index remained near highs not seen in five years, as bets on a stronger U.S. economy have given equities support. The S&P 500's slight fall last week was the first weekly drop after a seven-week string of gains to start the year.

Banks and other financial stocks were among the worst performers on worries about the sector's exposure to Italy's massive debt. The KBW Bank Index <.bkx> fell 1.1 percent.

The Dow Jones industrial average <.dji> dropped 92.14 points, or 0.66 percent, to 13,908.43. The Standard & Poor's 500 Index <.spx> dropped 11.65 points, or 0.77 percent, to 1,503.95. The Nasdaq Composite Index <.ixic> dropped 12.65 points, or 0.40 percent, to 3,149.17.

Barnes & Noble Inc shares jumped 10.6 percent to $14.94 after the bookseller's chairman offered to buy its declining retail business.

The Nasdaq received support from Amgen Inc , up 4.9 percent at $91.03, after rival Affymax issued a voluntary recall of its only drug, an anemia treatment that competes with Amgen's top-selling red blood cell booster, Epogen. Affymax shares slumped 84.6 percent to $2.55.

The FTSEurofirst-300 index of top European shares <.fteu3> unofficially closed up 0.04 percent and Italy's main FTSE MIB <.ftmib> ended up 0.7 percent after earlier gaining near 4 percent.

U.S. equities will face a test with the looming debate over so-called sequestration, U.S. government budget cuts that will take effect starting on Friday if lawmakers fail to reach an agreement over spending and taxes. The White House issued warnings about the harm the cuts are likely to inflict on the economy if enacted.

"Sitting out there is the one thousand pound gorilla - the sequester issue - and certainly nothing is happening there," Ghriskey said.

Lowe's Companies Inc lost 1.6 percent to $37.08 after the home improvement retailer posted fourth-quarter earnings.

With 83 percent of the S&P 500 companies having reported results so far, 69 percent beat profit expectations, compared with a 62 percent average since 1994 and 65 percent over the past four quarters, according to Thomson Reuters data.

Fourth-quarter earnings for S&P 500 companies are estimated to have risen 6 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.

(Editing by Kenneth Barry, Jan Paschal and Nick Zieminski)

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