European stocks sank following Italian market retreat

European stocks struggle today as the U.S. faced the first government shutdown in 17 years and Italian Prime Minister Enrico Letta fought to save his administration. Asian shares and U.S. index futures also retreated.

The Stoxx Europe 600 Index fell 0.7% to 310.02 at 8:05 a.m. in London. The gauge has still advanced 4.3% in September as the Federal Reserve held off from trimming its monthly asset purchases. It has surged 8.8% since the end of June, heading for the biggest quarterly gain in four years. Standard & Poor’s 500 Index futures fell 0.8% today, while the MSCI Asia Pacific Index sank 1.5%.

“The news flow has turned decisively negative in the last few days,” Chris Weston, chief market strategist at IG in Melbourne, wrote in an e-mail for Bloomberg. “In Europe, all five ministers Silvio Berlusconi requested to resign did so, and a confidence vote is now scheduled for Wednesday. The U.S. budget negotiations and fiscal cliff look no better, and are the main point of concern from clients today.”

In Italy, UniCredit lost 4.3% to 4.57 euros and Intesa Sanpaolo sank 4.9% to 1.50 euros. Prime minister Letta said he’ll request a confidence vote for Oct. 2 in an attempt to save his five-month-old administration after Silvio Berlusconi withdrew his support from the ruling coalition and pulled his ministers from cabinet.

Italian bank stocks fell heavily, dragged down by weakness in the countrys bonds, and by the political crisis. “This will negatively affect cost of funding and cost of equity of the Italian banks,” said Citigroup, in a note. Intesa Sanpaolo shares fell 4.7% at the open, while Mediobanca and UniCredit fell as well. Intesa Sanpaolo appointed a new chief executive over the weekend, after the resignation of Enrico Cucchiani.

“The combination of U.S. and Italian political risks has eroded much of the positive sentiment seen after the Feds decision to delay tapering two weeks ago,” said strategists at Barclays cited by The Wall Street Journal.