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London (AFP) – European stock markets slid Monday after heavy falls in Tokyo, as investors reacted to a budgetary impasse in Washington and political unease in Italy, sending the country’s bank shares crashing.

London’s benchmark FTSE 100 index dropped 0.67 percent to 6,468.75 points in morning deals, the CAC 40 in Paris shed 0.87 percent to 4,150.44 points and Frankfurt’s DAX 30 declined 0.64 percent to 8,606.18.

In Italy, the FTSE Mib lost 1.56 percent to 17,371.47 points compared with Friday’s closing value.

The rate of return demanded by investors on 10-year Italian government bonds meanwhile rose to 4.598 percent from 4.416 percent on Friday.

“On the continent, the real story centres around the heavyweight Italian banks, with Unicredit and Intesa Sanpaolo dropping more than four percent at the open as the farcical political situation causes further wobbles for the Italian markets,” said CMC Markets trader Nick Dale-Lace.

Recession-hit Italy is braced for a showdown between Prime Minister Enrico Letta and billionaire tycoon Silvio Berlusconi.

After weeks of bickering, Berlusconi on Saturday said he was pulling his party’s five ministers out of a fragile coalition government with the left and called for early elections as soon as possible for the embattled eurozone nation.

In reaction, the euro was down to $1.3498 from $1.3519 late on Friday in New York. The dollar slid to 97.81 yen from 98.24 Friday.

Tokyo’s stock market dived 2.06 percent on Monday as the dollar dropped sharply against the yen on concerns about a budgetary stand-off in Washington that threatens to shut down parts of the government.

“The amount of uncertainty that is billowing out from the other side of the Atlantic at the moment is set to finally overwhelm those last few bulls still hanging around on the off chance that the U.S. bureaucracy might come up with a clear, concise plan of action,” said Capital Spreads dealer Jonathan Sudaria.

With lawmakers on Capitol Hill unable to reach agreement on a new budget, thousands of federal workers are expected to be told to stay at home from Tuesday.

Traders fear an extended impasse as Republicans say they will only agree to a deal that includes cuts to President Barack Obama’s health law overhaul.

Adding to the crisis is the a looming row over the U.S. debt ceiling, which must be raised before mid-October, when the government runs out of money to pay its bills.

Economists expect talks on that to also go to the wire, rekindling memories of a face-off in 2011 that resulted in the loss of Washington’s triple-A credit rating and heavy losses on global stock markets.

On the London Bullion Market, the price of gold rose to $1,338.14 an ounce from $1,321.50 on Friday.

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