By Saikat Chatterjee
LONDON (Reuters) - European stocks gave up early gains and bond yields recovered from lows as early elections loomed in Italy after the anti-establishment 5-Star and League parties abandoned plans to form a government.
European stocks were a mixed bag, after Asian shares mostly gained on signs the United States and North Korea were still working towards holding a summit.
Early in the European session, the euro, Italy's government debt and its FTSE MIB stock index all rose in opening trades. But those gains quickly dissipated.
European stocks were trading flat on the day and Italian bond yields were up 3 basis points on concern new elections would turn into a debate on euro membership.
"We doubt this rally in markets has legs as what this means is that the next election in Italy becomes a referendum vote on euro membership," said Frederik Ducrozet, senior European economist at Pictet Wealth Management.
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Italian President Sergio Mattarella is expected to ask former International Monetary Fund official Carlo Cottarelli on Monday to head a stopgap government. He will meet Cottarelli at 1130 am (0930 GMT) on Monday, an official said.
His refusal to accept as economy minister Paolo Savona, who had threatened to pull Italy out of the euro, forced the 5-Star and the League to abandon efforts to form a government.
The euro initially rallied 0.6 percent to $1.1728, pulling itself above 6 1/2-month lows, but headed back towards the day's lows to trade only 0.1 percent higher at $1.1655.
The single currency strengthened by 0.8 percent against the Swiss franc, rebounding from near three-month lows to trade at 1.1629, but also gave up much of those gains.
Italian 10-year bond yields had dropped 10 basis points to 2.35 percent in early trade, coming off one-year highs, but investors quickly booked profits, pushing yields up 3 basis points on the day.
Italy's FTSE MIB index turned negative on the day after climbing 1.4 percent earlier as financials and utilities stocks surged.
"If there are new elections in autumn, then the populists are likely to get a stronger share and a more extreme mandate," said Peter Chatwell, head of European rates strategy at Mizuho International.
Europe's STOXX 600, and Germany's DAX were flat on the day. MSCI's main European index was down 0.1 percent while its Asian counterpart rose 0.4 percent as a retreat in oil prices from record highs helped sentiment.
OIL SLIDES
Oil prices extended their decline from last week on growing expectations that major oil producers may ease their 17-month-old production cuts.
A return to the oil production levels that were in place in October 2016, the baseline for the current deal to cut output, is one of the options for easing curbs, Russia's energy minister said on Saturday.
Brent crude futures dropped as much as 2.6 percent to $74.49 per barrel, their lowest in about three weeks. They last stood at $75.00, down 1.8 percent.
U.S. crude futures dropped to six-week low of $65.80 per barrel, shedding 3.1 percent, and is on course to post its fifth day of decline.
U.S. S&P500 mini futures rose 0.3 percent, but market holidays in the world's two biggest financial centres -- London and New York -- could make trading slow and illiquid for the day.
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(Reporting by Saikat Chatterjee, additional reporting by Abhinav Ramnarayan and Helen Reid; editing by Larry King)