HONG KONG (CNNMoney)
The Hang Seng in Hong Kong fell 0.6%, while the Nikkei in Tokyo dropped about 1.4%. The Shanghai Composite was in positive territory after paring early losses.
The Japanese yen, a safe-haven currency, strengthened overnight as investors sought refuge. European markets are not yet open for trading.
Initial results from Sunday's election showed the center-left party of Pier Luigi Bersani leading in both chambers of parliament. But later projections indicated that former Prime Minister SIlvio Berlusconi and his anti-austerity allies were not far behind in the Senate race, which is decided on a regional basis.
Related: CNN coverage of the Italian election
While the final outcome is still uncertain, investors are concerned that "gridlock" in the Italian Senate could undermine the progress Italy has made in overhauling its troubled economy.
Investors in the U.S. succumbed to jitters in the final hour of trading Monday, with the Dow and S&P 500 suffering their biggest one-day decline of the year after a late-day sell off.
In a clear sign of unease, Wall Street's so-called fear gauge, the CBOE market volatility index, or VIX (VIX), surged 32%.
Even though election results have not been certified in Italy, it is clear that voters have rebuked pro-austerity policies, exposing the country to questions about its commitment to fiscal consolidation.
Italy's political system encourages the forming of alliances, and a shaky coalition now seems like the best possible result.
Related: What's at stake in Europe's elections
Markets had hoped Italian voters would give Bersani a clear mandate to pursue the reforms started by Mario Monti, possibly including the economics professor's party in a coalition.
"Elections are more problematic than market scares or sentiment shifts as they can't be undone by printing money," Steven Englander, a currency strategist at CIti, wrote in a research note.
The scale of the challenge awaiting the next government should not be underestimated, and Bersani's coalition could face opposition from within its own ranks to more radical structural reforms, even if it prevails in the Senate.
Italy's economy has stagnated for years, and suffered the biggest contraction of any G7 nation in 2012 -- it shrank by 2.2%. Last week, the European Commission said it would contract by a further 1.0% this year, double the rate it had previously forecast.
At the same time, Italy has to service debts of two trillion euros, the eurozone's second biggest debt mountain -- relative to the size of the economy - after Greece. That costs some 5% of gross domestic product -- or about 100 billion euros --- each year and as the economy shrinks, the government has to retain an ever greater share of national income to pay for it.
Unemployment will rise to 11.6% in 2013, according to the European Commission, and then 12% next year.
First Published: February 25, 2013: 10:25 PM ET
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