By Sara Sjolin and Carla Mozee, MarketWatch

But Stoxx Europe 600 rises as investors shake off the news

Italian stocks retreated Monday after Prime Minister Matteo Renzi's resignation announcement following defeat of a constitutional referendum, but questions remain about political uncertainty and the possibility of another eurozone crisis.

Italy's FTSE MIB closed down by 0.2% at 17,050.21, but escaped an intraday loss of as much as 2.1%, FactSet data showed.

Bank shares bore the brunt of the selloff in Milan as the industry has been trying to unload more than EUR200 billion in bad debt off its books. The FTSE Italia All-Share Banks Sector Index fell 2.2%, although that's marked an improvement from a 4.6% loss during the session.

Read:The other loser in Italy's vote -- its big banks (http://www.marketwatch.com/story/the-other-loser-in-italys-vote-its-big-banks-2016-12-05)

Although the referendum officially was on Renzi's plan for a legislative overhaul, the vote was widely seen as a vote of confidence in the prime minister and his government. There's concern now the result sets the stage for a political shake-up that ultimately could lead Italy out of the eurozone.

"Exactly what this means for markets still needs to be determined, but the uncertainty this brings certainly won't be welcomed," said Tony Cross, market analyst at TopTradr, in a note.

"However, this should make the recapitalization of Italy's struggling banks that bit harder, and Mario Draghi had pledged that any volatility stemming from this could be met with further extensions to ECB bond buying," he said.

The vote took place before the ECB's policy meeting on Thursday, at which it will discuss its bond-buying program.

Supporting Italy would come from "first and foremost the continued and current pace of the QE program at 80 billion euros a month. The expectations that are being floated around a bit that that could be cut to EUR60 billion a month -- that wouldn't be helpful to Italy in the short-term," said Jim Smigiel, portfolio manager of SEI's Dynamic Asset Allocation Fund , in a telephone interview. The fund has $2.2 billion in annual assets under management.

Investors sold Italian debt (http://www.marketwatch.com/story/italian-bond-prices-drop-yields-surge-after-referendum-defeat-2016-12-05), a move that pushed the yield on Italy's 10-year bond above 2% during Monday's session, according to TradeWeb.

Other European stock markets also opened lower, but during morning trade, "equity markets were hit by a massive short squeeze. European indices and U.S. futures aggressively reversed losses," said Ipek Ozkardeskaya, senior market analyst at London Capital Group, in a note. The pan-European Stoxx Europe 600 index closed up 0.6% at 341.27.

Euro short: Among Italy bank shares, Banca Popolare di Milano Scarl (PMI.MI) finished 7.9% lower and Intesa Sanpaolo SpA (ISP.MI) fell 1%. Shares in troubled Banca Monte dei Paschi di Siena SpA (BMPS.MI) lost 4.2%. See: Monte dei Paschi advisers scramble for rescue plan (http://www.marketwatch.com/story/monte-dei-paschi-advisers-scramble-for-rescue-plan-2016-12-05)

UniCredit SpA (UCG.MI) fell 3.4%, with Italy's largest lender in talks to sell its Pioneer Investments unit (http://www.marketwatch.com/story/unicredit-in-talks-with-amundi-for-pioneer-sale-2016-12-05) to Amundi SA (AMUN.FR).

Smigiel said SEI's clients have some exposure to Italian equities. "This is one area where we would certainly recommend active management. We would be somewhat hesitant to just take a broad index-like passive exposure to Italy."

After the referendum, the euro fell to a 21-month low (http://www.marketwatch.com/story/euro-tumbles-to-21-month-low-against-dollar-after-italys-no-vote-2016-12-05) against the dollar to $1.0505 before heading higher, to $1.0721.

"From a shorter-term, tactical perspective, we have been short the euro since prior to Brexit," said Smigiel. "We don't expect the [ECB bond-buying] tapering to be coming and we're looking out on the horizon and there's just one political risk after another in 2017," he said. He expects the euro to hit parity with the U.S. dollar next year.

Read:What to know now that Italy has voted 'no,' with Renzi set to quit (http://www.marketwatch.com/story/what-to-know-now-that-italy-has-voted-no-with-renzi-set-to-step-down-2016-12-04)

And see:How Italy's referendum could spark a 'systemic crisis' in the eurozone (http://www.marketwatch.com/story/how-italys-referendum-could-spark-a-systemic-crisis-in-the-eurozone-2016-11-29)

Other indexes: In Frankfurt, the DAX 30 index climbed 1.6% to close at 10,684.33, with Deutsche Boerse among the few decliners.

France's CAC 40 index ended up 1% at 4,574.32, and the U.K.'s FTSE 100 index (http://www.marketwatch.com/story/ftse-100-rises-as-bank-shares-recover-from-downbeat-start-2016-12-05) ended up 0.2% at 6,746.83.

Economic news: The final November reading for the eurozone services purchasing managers index came in at 53.8, slightly lower than the flash reading of 54.1. That figure still marked an 11-month high.

Activity in the U.K. services sector hit a 10-month high in November (http://www.marketwatch.com/story/uk-services-pmi-rises-to-552-in-november-2016-12-05-104853749). The services PMI from IHS Markit/CIPS was 55.2, compared with a 54.0 FactSet estimate.

 

(END) Dow Jones Newswires

December 05, 2016 11:58 ET (16:58 GMT)

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