Greek and French election results rattled investors on Monday by undermining confidence in the region's plans to cut spending and tackle its debt crisis, sending the euro to a three-month low.
European shares also initially traded lower, with Greek stocks down 6.4%, but reaction was muted with the UK market closed for a holiday. Wall Street stocks were expected to reflect the weaker tone when they being trading.
Investors sold bonds of other weaker euro zone member states after the two pro-bailout parties in Greece failed to win a parliamentary majority, rekindling fears over the country's future in the single currency.
"The Greek election outcome is the ultimate Greek tragedy. Not having a cohesive government means the IMF will not release further funds. Without those funds, Greece will have to leave the euro zone," Louis Gargour, chief investment officer of London-based hedge fund LNG Capital, said.
After the more widely expected result, French Socialist Francois Hollande's victory over Nicolas Sarkozy, demand for the government's debt pushed the yield on 10-year bonds to 2.79%, it lowest in seven months.
But the gains may be only temporary and much will depend on how the new French President handles relations with Germany's Chancellor Angela Merkel over German-led austerity measures, which the markets favour.
"Hollande's victory marks a turning point in the EU policy debate," Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, said.
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"Despite professed sympathy for the growth dilemma, markets will punish any government that strays from its fiscal targets," Cooper said. "Spain and the Netherlands were recently at the sharp end of the stick."
Growth worries
The potential for greater uncertainty in the European currency bloc's approach to its more than two-year old debt crisis comes after Friday's U.S. nonfarm payrolls report dealt a heavy blow to hopes of a further strong recovery in the world's largest economy.
"The election results at the weekend are not helpful to calming the worries already in the market after disappointing (U.S.) payrolls report on Friday," said Gerhard Schwarz, head of equity strategy at Baader Bank.
World equities reflected the worsening outlook, falling 0.6% to 14-week lows at 319.70 points after Wall Street posted its biggest weekly decline of the year, following the jobs data which showed US hiring slowed for a second straight month.
The euro zone's blue chip Euro STOXX 50 index opened down 1.1% to 2,222.37, its lowest level for the year, on the French and Greece votes, but later recovered to be virtually unchanged.
The euro touched a low of $1.2955 in Asian trading as the election results become clear, but with the key UK market closed, it climbed back to trade around $1.3035, still at the bottom of its trading band between $1.30 and $1.35 seen since February.
Peripheral bonds hit
Europe's sovereign debt markets were most affected by fears over the future of the region's fiscal austerity policies, with investors fleeing to safe-haven German government bonds.
German Bund futures hit record highs of 142.44, up 14 ticks, while investors sold Spanish and Italian bonds.
Cash 10-year German yields were 2 basis points lower at 1.56%, within a whisker of the record low.
Bond investors were expected to keep away from other peripheral euro zone markets in coming days as they watch efforts to form a ruling coalition in Athens.
Spain has become the recent focus of the debt crisis and industrial output for March confirmed the economy's weakness. The government is expected to announce a rescue plan for ailing Bankia as part of a wider reform of the banking system, sources said on Monday.
The Spanish government 10-year bond yield was little changed at 5.8%, but some analysts expected it could re-test the psychologically important 6% level.
In commodity markets the surprisingly weak non-farm payrolls report for April fueled fears of a drop in global demand, helping send Brent crude oil below $113 a barrel, its lowest since late January.
US crude futures were down 61 cents at $97.88 a barrel, after dropping to as low as $95.34, its weakest level of the year.
Spot gold was virtually unchanged at $1,639.60 an ounce, with prices seen getting some support from jewelers in India, the world's biggest buyer of bullion, after the government there decided to scrap an excise duty on jewelry it imposed in March.