Italian shares trimmed most of the day’s losses yesterday on expectations that political uncertainty in the country will be resolved and European indexes tracked the recovery to close nearly flat.

The Italian share index started trimming losses after centre-left leader Matteo Renzi – a supporter of economic reforms – emerged as a frontrunner to replace Prime Minister Enrico Letta.

After the market close, a statement from the premier’s office said Letta would tender his resignation today after his Democratic Party called for him to step aside to make way for a new government.

“There appears to be some progress in the Italian political platform and with that progress, investors are feeling more confident and certain that there won’t be any stalemate like we saw the last time,” Lorne Baring, managing director, B Capital Wealth Management, said. By the end of the session, Italy’s benchmark FTSE MIB was 0.2 per cent lower at 20,110.30 points after falling as much as 1.6 per cent.

“If Renzi becomes prime minister it could actually be a positive because he might be a little bit more forceful on the reform agenda,” said Wouter Sturkenboom, strategist at Russell Investments, which manages about$256 billion of assets.

The pan-European FTSEurofirst 300 index closed 0.1 per cent lower at 1,325.39 points after falling as low as 1,314.66 points, its first weaker close for seven sessions.

Analysts remained positive on the European stock market’s outlook in the medium to longer term, but said equities could struggle in the near term for several reasons.

“Earnings are not sufficiently beating estimates to drive the markets up from here. However, European markets are more attractive than other developed markets and we think there will be continued rotation by investors to Europe,” Baring said.

Among standout movers, Swiss food group Nestle fell 1.5 per cent after it said it may undershoot its long-term growth targets again this year due to weaker demand from emerging markets and price pressures in Europe.

Also a feature, Britain’s Rolls-Royce slumped 13.6 per cent – wiping almost €4 billion off its market value – and sent shivers through the defence sector after it said US and European spending cuts would halt profit growth in 2014.

Britain’s aerospace and defence index fell 7.8 per cent, its biggest one day decline since 2008.