Despite the prospect of automatic cuts in government spending starting on Friday, stock markets in Wall Street were still rising in late afternoon trading. Better than expected results from Home Depot, America's DIY chain, and department chain Macy's helped improve investors' mood. The Dow Jones Industrial Average was up almost 0.8pc, while the S&P 500 gained 0.6pc. 18.10 And just while we're on the subject of those tax cuts, House Speaker John Boehner said the US House won't act to replace automatic federal spending cuts until the Senate "gets off their ass" and passes a plan, Bloomberg reports. We have moved a bill in the House twice; we should not have to move a third bill before the Senate gets off their ass and begins to do something. The cuts will reduce spending by $85 billion in the final seven months of this fiscal year and by $1.2 trillion over the next nine years. Half of the reductions will affect defense spending, while the rest will be spread over other federal agencies. US President Obama and the Democrats want to replace part of the cuts with higher tax revenue, while Republicans oppose more taxes. US House Speaker John Boehner 18.00 US markets are holding up as a result of some good economic data coming out of the country. One piece has been house prices. US home prices closed out 2012 with the biggest annual gain in more than six years while sales of new homes spiked in January, the latest sign that the long-suffering housing market was on the mend, data showed on Tuesday. American consumers, meanwhile, grew more optimistic in February even as payroll taxes rose and about $85 billion worth of government spending cuts were due to take effect on March 1. The S&P/Case Shiller composite index of 20 metropolitan areas showed home prices jumped 6.8 percent year-over-year in December, the biggest gain since July, 2006, just before the bottom began to fall out of the U.S. housing market. Separately, Commerce Department data showed sales of new homes jumped 15.6 percent to a 4-1/2-year high. The percentage increase was the largest in almost 20 years. 17.40 A quick lunchtime look at US markets (it's 12.40pm in New York - don't worry it is still nearly home time in the UK). They have come off a bit since early trading but they are still up. The Dow Jones is up 0.7 pc, the S&P 500 is up 0.1pc and the Nasdaq is now flat. 17.29 European Commission president Jose Manuel Barroso has appealed to EU leaders not to give in to populism after Italian voters roundly rejected the austerity policies pursued by outgoing prime minister Mario Monti. Speaking at a Reuters Summit he said: I hope we are not going to follow the temptation to give in to populism because of the results in one specific member state. The question we have to ask ourselves is the following: should we determine our policy, our economic policy, by short-term electoral considerations or by what has to be done to put Europe back on the path to sustainable growth? For me the answer is clear. He reiterated that efforts to revive Europe's economy would take time and required determination. The fact Italian voters had turned Monti out of office did not mean his policies, or those advocated by the European Union, were wrong. 17.15 Bloomberg has just noted that the decline in the Italian FTSE MIB, which fell 4.9pc today, is its largest decline since April 10. The volume of shares changing hands was 41 percent greater than the average of the last 30 days, according to data compiled by Bloomberg. Italy's FTSE MIB fell 4.9pc in trading on Tuesday. 17.01Today's fall in markets is a stark reminder that the eurozone needs strong political leadership to survive, says Angus Campbell, head of market analysis at Capital Spreads. Whilst the sell off in equity markets today has not been what one would classify as a stock market crash, it has acted as a sharp reminder that without strong political leadership from the key member states, the wider eurozone has the potential to fall apart. There's also the worry of contagion to consider, as Spain saw its borrowing costs spike today in line with the Italian 10 year bond. It was unsurprisingly the banks that suffered most from today's risk aversion and now the major question on everyone's lips is can we expect to see further weakness in equities as the political uncertainty in Italy rumbles on or does this present a golden buying opportunity. Clients have been positioned neatly for declines ahead of the falls and expect the weakness to continue as there's been a distinct lack of buyers coming in. 16.45 European markets are now closed and it has not, unsurprisingly, been a good day for them. The FTSE 100 in London closed down 1.3pc CAC in Paris down 2.6pc DAX in Frankfurt down 2.3pc IBEX in Madrid down 3.3pc 16.33 Pierre Brianço, Reuters Breakingviews European editor, has argued that the EU and Germany should keep quiet when a country votes against austerity and instead chooses a government that is pro-growth. It makes for an interesting read. 16.26 He has also vowed not to "abandon ship," after being asked if he planned to resign after failing to secure a majority for his centre-left coalition in both houses of the Italian Parliament. 16.24 Centre-left leader Pier Luigi Bersani is holding a press conference, where he has told reporters that while his coalition "came first" but did not win, he must react "with humility" to the outcome of the election so he can be of use to the country. He has vowed to propose basic reforms for the political system to support those suffering in the crisis in the lower house, and that he would appeal to rival Silvio Berlusconi and surprise newcomer, the anti-establishment party of comedian Beppe Grillo, to assume their responsibilities in the upper house. Bersani's centre-left coalition was the frontrunner to win the Italian election, but in the event only won a majority in the lower house 16.00 And as investors sell European equities, the flight to safety seems to have started. UK borrowing costs have FALLEN - the country that has just been stripped of it's AAA rating by Moody's is being sought as a safe haven. Yields on 10 year government bonds have fallen below the psychological barrier of 2pc and hit 1.99pc. 15.53 As European markets enter their final hour of trading, Chris Beauchamp, market analyst at IG Markets, says its clear that they are still in "shock" from the lack of a result in the Italian election. The eurozone crisis is back, he says. The news came as a nasty surprise for those accustomed to the steady march higher. The Italian people have spoken, but we're not yet sure what they said. What is obvious, however, is that popular discontent with austerity measures remains strong in Europe. This is a warning to anyone who assumed that Mario Draghi had quelled the crisis with his pledge to defend the euro. Mr Draghi can defuse tensions in financial markets, but he can't win over voters. There were some signs that Italian politicians, Silvio Berlusconi included, may be willing to talk, but markets remain susceptible to offhand comments, as so often in the past. It was dormant for quite a while, but the eurozone crisis is back with us. How we've missed it. European Central Bank chief Mario Draghi 15.39 Closer to home, deputy governor of the Bank of England Paul Tucker has been discussing different ways of kick-starting the British economy at the Treasury Select Committee. One tool the central bank is considering, according to Mr Tucker, is negative interest rates in an attempt to force banks to lend more to small businesses. Negative interest rates would mean depositors, such as high street lenders, would have to pay the central bank to place their money with it. So they would rather lend the money out. However, the Bank has talked about cutting rates below their current record low of 0.5pc in the past, but has ruled out the policy on every occasion due to the potentially crippling damage it would do Britain's building societies, which are more dependant on deposit income than banks. 15.15 Bernanke also cautioned against the spending cuts that are due to come in next week, saying they would place a "significant" additional burden on the economic recovery: The Congress and the administration should consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually. 15.09 Also giving Wall Street a boost are comments from Ben Bernanke, prepared ahead of his appearance in front of the Senate Banking Committee later. According to Reuters, he has strongly defended the US central bank's bond buying stimulus, saying its benefits clearly exceed possible costs. 15.04 Helping Wall Street higher is data showing that US home prices rose at a healthy pace in December compared with a year ago, fuelled by rising sales and a smaller supply of available homes. The Standard & Poor's/Case-Shiller 20-city home price index rose 6.8pc in December compared with the same month a year ago. That's up from a 5.5pc annual gain in November. 14.50 Despite Wall Street's rise, European bourses remain under the weather. The FTSE 100 is off 1.1pc - slightly paring its losses - to 6280 and Italy's MIB is 642 points lower at 15707. Meanwhile, the euro has steadied. Against the pound, it is trading at 86.4p. 14.37 American stocks are heading higher as Federal Reserve chairman Ben Bernanke prepares to head to Capitol Hill later to explain what the Fed will do to accelerate the economic recovery. 14.31 Wall Street has opened and the Dow Jones has bucked the wider trend by ticking up 67 points to 13854. 13.55 And another dispatch from Telegraph Blogs. Tim Stanley writes on the Italian election that Silvio Berlusconi's comeback shows that he knows what the Italian people like: Silvio Berlusconi has done it again. After being written off as a hopeless old fraud with less chance of an electoral comeback than Mitt Romney, he has placed second in the Italian elections and might even hold the balance of power in the new coalition. The man has risen from the dead more often than Dracula - and for more benign a reason. While his snobbish critics see him as the embodiment of a certain Italian braggadocio, Berlusconi understands his people in a way that his opponents don't. He is a populist, a skilful manager and - best of all - a winner. Nothing breeds success like success and Silvio's political career has been unusually successful. 13.27 Mats Persson, director of Open Europe, has blogged for The Telegraph on the Italian election. He writes: Italians voted for and against all kinds of stuff - and it would be a major mistake to lump all the anti-austerity forces together in some sort of generic protest vote (Grillo and Berlusconi are very different animals). But if you sit in Brussels, there were two, unambiguous blows. First, 57 per cent of Italians voted for parties that explicitly oppose austerity, whether EU-mandated or otherwise. Second, the Five-Star Movement led by comedian Beppe Grillo received over 25 per cent of the vote. Mario Monti, the outgoing prime minister - who was put in place to lead a Brussels-friendly, pro-reform government - mustered less than 10o per cent of votes in both houses. Think about that for a second. In practical terms, this means that a party - Grillo's Five Star Movement, which has called for a referendum on whether the country should leave the single currency and whether Italy should default on some of its debt - will have roughly twice as many seats in Italy's Lower House than the man hailed in Brussels and Berlin as Italy's saviour . It also means that a former European Commissioner and adviser to Goldman Sachs just got completely hammered at the polls by a former comedian. Pierre Moscovici, France's finance minister. 13.03 France's finance minister has been talking this morning about Italy's election. He said the inconclusive result showed that Europe's leaders must give voters hope of stronger growth to offset painful austerity. Reuters reports: Pierre Moscovici said the political deadlock emerging from Italy's general election was "no doubt a worry" and hoped that centre-leftist Pier Luigi Bersani would be able to use his lower house majority to form a solid and reformist government. But while he said the painful austerity reforms undertaken by outgoing technocrat premier Mario Monti had been necessary, he told the Reuters Euro Zone Summit that Italy and Europe also needed to be given "another perspective." "The message from Italy is: 'Be careful, when you are in a situation in which you ask populations to make sacrifices for long periods, at the end you risk having protests'," Moscovici said in his Paris office. There needs to be another perspective - which is growth again. 12.38 While we're on the subject of the eurozone crisis, what's happening in Greece at the moment? Mark Lowen, the BBC Athens correspondent, tweets that he is at the launch of Greece's equivalent of The Big Issue: 12.16 Europe's bourses remain a sea of red this lunchtime - as the screenshot below from Bloomberg shows.The FTSE 100 is off 1.4pc to 6266, Italy's MIB is down4.6pc to 15594, France's CAC is 2.4pc lower at 3632 and Germany's DAX is 1.9pc lower at 7629. 12.13 Italian market watchdog Consob has banned short selling on shares in Italian bank Intesa Sanpaolo both today and tomorrow. 12.03 And who would govern Italy if no government can be formed? Open Europe explains: If no government can be formed, the Italian President will have to appoint a temporary, caretaker government to lead the country until the new elections (which is similar to what happened when Berlusconi resigned in November 2011 and Monti took over). That government, too, needs a majority "vote of confidence" in both houses of the Italian parliament. Until any new government is formed, Mario Monti remains in charge as caretaker Prime Minister, but will be unable to pass substantial laws. 12.01 What next for Italy? Open Europe has come up with three possible scenarios to avoid a situation where Italy is completely ungoverned: A national unity government, if Bersani, Berlusconi and Monti join forces - could be possible but may not be enough to avoid snap elections (maybe as early as next year). The deal could possibly involve an agreement to change the electoral law to avoid another stalemate; Grillo U-turns and agrees to form a coalition with Bersani's centre-left alliance; A re-run election (presumably within 3-4 months). Open Europe adds that under scenarios one and three, there will be a lot of pressure to change the electoral law before new elections to avoid a similar stalemate. "For that, however, there needs to be a majority in both houses, meaning that we're looking at a potential Catch-22," says Open Europe. 11.41 The European Commission has reacted to the Italian result. It has indicated that Italy must pursue policies to boost growth and employment to be able to reduce its unsustainably high public debt. Commission spokesman Olivier Bailly said: Markets are free to react the way they want. As far as the Commission is concerned, we would like to underline our full confidence in the Italian authorities in their capacity to find and establish a political majority that will continue to deliver a growth and jobs agenda, which is what Italy needs to reduce the unsustainable level of its debt. 11.28 And for the armchair psephologists out there, the Guardian has this very detailed graphic showing the majority party, or coalition, in each of Italy's regions, provinces and 8,000 municipalities for both houses of parliament. 11.23 Harry Alsop has written this handy breakdown for The Telegraph of how the votes and seats were shared among the main players in the Italian election: The Chamber of Deputies There are 630 elected members of Italy's Chamber of Deputies, with parties given seats in direct proportion to the number of votes they attain, subject to a couple of conditions. If they are in a coalition, that bloc must gain 10 per cent of the overall vote, and the party must have at least two percent of the overall vote, in order to claim their seats. If the party is not in a coalition, it must have four percent of the vote. In order to guarantee a majority for the largest party, it is automatically awarded 340 seats if it has less than 55 per cent of the vote. Mario Monti's bloc won 18 seats in the Senate. 11.13 Philip Olterman, deputy editor of the Guardian's Comment is Free site, flags up German newspaper Bild's reaction to the Italian vote: 11.03 Thinktank Demos published a paper earlier this month on the appeal of movements such as those headed by Beppe Grillo, and in particular, the importance of social media in bolstering their support. Their paper highlights the economic anxieties among Grillo's supporters. It points out that when asked to list their top two concerns from a list of 18, Beppe Grillo Facebook fans were most likely to cite economic issues as one of the top two. Disaffection about the future is clear too. In general, Grillo's Facebook fans were more likely than the Italian public to be pessimistic about the future, with 31pc thinking their lives would be worse in a year and 66pc thinking the economic situation in Italy is going to get worse. But it was not just the economic situation with which they were dissatisfied. The majority of respondents to Demos' survey were not at all satisfied with democracy in Italy and asked why they supported Grillo, they said they do so because of disillusionment with the main parties or wanting change. 10.53 Following that auction, Annalisa Piazza of Newedge Strategy points out that the inconclusive outcome of the elections has already weighed on Italian supply. But she adds: Tomorrow's BTPs auction will be the real test for market appetite for the Italian debt, given the uncertain perspective for the Italian political and econonomic situation. Prospects for the Italian debt remain gloomy, with risks that rating agencies might downgrade the country due to the additional weight of the political uncertainties. We still expect the Italian curve to steepen further going ahead. 10.41 The inconclusive election result has contributed to a jump in Italy's six-month borrowing costs at an auction this morning. The treasury sold €8.75bn of six-month bills at a yield of 1.24pc. That compared with 0.73pc at a similar sale at the end of January and was the highest level since October 2012. Rome will face a tougher market test on Wednesday, when it offers between €3bn and €4bn of a new 10-year bond. 10.26 "Hold onto your hats. It's about to get interesting again. That's the verdict of Jeremy Warner, the Telegraph's business commentator. He writes that the eurozone crisis has entered a "decisive new phase," where financial turmoil is to be replaced by political instability: The Italian election has produced a predictably shambolic outcome, shifting the eurozone crisis into a decisive new phase. Financial instability, it seems, is to be replaced by political instability, with electorates grown weary of the repeated rounds of self defeating austerity forced on them by Europe's political elites. Last time this happened, the response was to impose unelected technocratic governments on the wayward nations, but it is not going to be so easy this time. Italians are in open rebellion, with Mario Monti's pro-reform Civic Choice finishing a distant fourth. Italians have voted en masse against Berlin's prescriptive austerity agenda. Already the signs are that this political explosion will reignite the financial crisis. Italian bond yields spiked, and equity markets fell sharply. It will be recalled that crucial to stilling the financial crisis was the European Central Bank's promise of "outright monetary transactions," an open ended commitment to buy sovereign debt without limit. In the end, not a single bond had to be purchased. The promise was enough to break the destruction cycle of deteriorating sovereign debt and banking conditions. It's possible that markets will now test the ECB's resolve afresh. Workers open the ballots in a polling station in downtown Rome (Picture: AFP) 10.14 Tristan Cooper, sovereign debt analyst at Fidelity Worldwide, highlights the political significance of Beppe Grillo's success - his party took 54 seats - and how it reflects Italians' social disaffection: Italy's protest vote against the Eurocrats has wrenched market attention away from the hunt for yield and back onto political risk. The social disaffection caused by youth unemployment has been strikingly reflected by the surge of the Five Star movement. This can only embolden anti-establishment and euro-sceptic parties in other countries with high and rising unemployment. Such groups have already proven themselves at the ballot box in Greece. Italian economic fundamentals are fragile and the recession still deep. At best, the political impasse in Italy will push back the market's expectation of a recovery there. At worst, the contraction could deepen as consumer and business confidence cowers under an extended period of political uncertainty. But, he did conclude on a - slightly - brighter note: The political will to preserve Eurozone stability has been proven in Greece. A new government in Italy, when it is eventually formed, is more likely to be unstable and ineffective than unorthodox and radical. Fiscal discipline is likely to be broadly preserved even if serious structural reforms are now off the agenda. Hence, the negative market reaction to events in Italy may provide an opportunity to buy into the periphery, albeit at significantly higher yields. 10.06 So, who is this Beppe Grillo anyway? The comedian's campaign was initially dismissed as a joke, but nobody's laughing now. Italians who are jaded by reform and cutbacks have been drawn to his anti-austerity message. The Telegraph's Harriet Alexander reported at the weekend on how Grillo's party, which was only founded four years ago, was born: 09.50 Italy's borrowing costs have risen sharply this morning. The yield on the 10-year bond has widened by 28.8 basis points to 4.8pc while Spain's has ticked up 10.5 basis points to 5.3pc. Germany's, on the other hand, has eased 7 basis points to 1.5pc and the UK's is 6.6 basis points lower at 2pc. 09.36 Mario Monti is to meet Italy's central bank governor and economy minister at midday (or 11am UK time). As Steve Collins, global head of dealing at London & Capital Asset Management, tweets: 09.31 While the euro has rallied against the pound, it has also come off its earlier lows against the dollar. It had fallen to a seven-week low against the American currency, but it is now trading around $1.31. However, with bond yields rising, traders said any bounce could prove fleeting and the euro could soon fall below $1.30. 09.16 Germany's economy minister has echoed those comments made by Michael Grosse-Broemer (cited at 09.02), reiterating that Italy needs to continue implementing reforms. Philipp Roesler said he could have imagined a better outcome for pro-reform parties in Italy, adding: There is no alternative to the structural reforms that are already underway and which include consolidating the budget and boosting competitiveness. 09.09 The euro has staged a rally this morning. Having slipped against the pound to a low of 85.8p, it's now risen to 86.3p: 09.02 Germany has added its tuppence worth on the Italian results. Michael Grosse-Broemer, a key ally of Angela Merkel, said that Italy needs a functioning government that will press on with outgoing technocrat Mario Monti's economic reform: It is important that Italy has a functioning government. Monti's reform path must be continued. 08.55 Italy's MIB is still deep in the red, off 651 points - or almost 4pc - to 15699. London's FTSE 100 is down 86 points, or 1.4pc, to 6268.