The finely balanced result of Italy's general election creates a prospect of prolonged uncertainty - the one outcome that analysts say the country's struggling economy can least afford.

Economists breathed a sigh of relief when exit polls pointed to a clear win for Romano Prodi's centre-left coalition. A comfortable parliamentary majority was seen as raising the chance for stability and reforms.

That reaction turned to dismay as the actual vote count painted a far more confused picture that could see either Mr Prodi or Prime Minister Silvio Berlusconi prevail by the narrowest of margins, or else opposing majorities in parliament's two houses.

"Different majorities in the Chamber and the Senate would be the worst possible scenario for markets," said BNP Paribas economist Luigi Speranza.

"It would open up a long period of uncertainty that could end with new elections, a grand coalition as in Germany, or some kind of government of technocrats." Analysts agree that G8 member Italy's chronically weak economy and creaking public finances need uncertainty like a hole in the head and are crying out for an intense period of reform.

Italy has grown at an average rate of just 0.6 per cent per year since 2001, well below the eurozone average, as domestic demand languished and exports lost market share to both Asian and European competitors.

Public finances are equally grim. The world's third largest debt pile rose in 2005 to 106.4 per cent of gross domestic product, the first increase in over a decade, and its deficit climbed to 4.1 per cent of GDP, the highest since 1996. "Italy's economy is in structural crisis and it needs shock therapy to get out of it," said Bank of America economist Lorenzo Codogno before the election.

"Whoever wins has about three months to convince markets he is serious about lowering the deficit and debt, and then they must set about passing reforms to liberalise the economy."

Economists' prescriptions for the eurozone's third largest economy are invariably the same, and include lower public spending, lower taxes and liberalisation of services.

Both sides' election programmes promised all this, though their pledges were couched in extremely vague terms.

Ratings agencies Standard & Poors and Fitch have Italy on a negative outlook and have indicated that they will lower its credit-worthiness unless the new government presents a credible strategy to cut the deficit and reverse the rising debt trend.

Italy already pays about five per cent of GDP in debt servicing costs, sucking badly needed resources from other sectors of the economy. A downgrade would raise those costs even more.

"A hung Parliament would be the worst possible result, it would be very negative for reforms which are so badly needed in Italy and it would be bad for prospects of fiscal consolidation as well," said Goldman Sachs economist Ines Lopes.

Fitch said after early exit polls that the prospect of a clear centre-left majority was positive for reform prospects, while S&P said Italy remained under close scrutiny but the election outcome would have no immediate impact on its rating.

BNP Paribas's Mr Speranza said a downgrade may come soon. "I'm sure Standard & Poor's didn't have a hung parliament in mind when they said the election result would have no impact on Italy's rating."

He said the bitterness of Italy's most acrimonious election campaign in decades made it all but impossible that the two sides could govern together, and even if a new election was called, it would not happen for months.

Italy's institutional procedures are notoriously slow and President Carlo Azeglio Ciampi's term of office expires in May, so the new parliament would have to elect a new president before fresh elections could be called. Even in the case of a clear victor, many analysts were sceptical that either side could shake up Italy's hidebound economy, create a more competitive business environment and resurrect what is often described as the sick man of Europe.

"Italy needs radical reform to cut its unit labour costs and regain competitiveness, but that can be a very painful process," said JP Morgan economist Silvia Pepino.

"It is not yet clear whether the country has the appetite for that kind of medicine."