Sequestration: Surrender is in the Air

The budget ax is about to fall, and there's little lawmakers in Washington are doing to stop it.

Despite a parade of dire warnings from the White House, an $85 billion package of deep automatic spending cuts appears poised to take effect at the stroke of midnight on Friday.

The cuts – known in Washington-speak as the sequester – will hit every federal budget, from defense to education, and even the president's own staff.

On Capitol Hill, Senate Democrats and Republicans each staged votes Thursday aimed at substituting the indiscriminate across-the-board cuts with more sensible ones. Democrats also called for including new tax revenue in the mix. Both measures failed.

Lleaders on both sides publicly conceded that the effort was largely for show, with little chance the opposing chamber would embrace the other's plan. They will discuss their differences with President Obama at the White House on Friday.

"It isn't a plan at all, it's a gimmick," Senate Minority Leader Mitch McConnell, R-Ky., said today of the Democrats' legislation.

"Republicans call the plan flexibility" in how the cuts are made, said Senate Majority Leader Harry Reid. "Let's call it what it is. It is a punt."

The budget crisis is the product of a longstanding failure of Congress and the White House to compromise on plans for deficit reduction. The sequester itself, enacted in late 2011, was intended to be so unpalatable as to help force a deal.

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Republicans and Democrats, however, remain gridlocked over the issue of taxes.

Obama has mandated that any steps to offset the automatic cuts must include new tax revenue through the elimination of loopholes and deductions. House Speaker John Boehner and the GOP insist the approach should be spending cuts-only, modifying the package to make it more reasonable.

"Do we want to close loopholes? We sure do. But if we are going to do tax reform, it should focus on creating jobs, not funding more government," House Speaker John Boehner said, explaining his opposition to Obama's plan.

Boehner, McConnell, Reid and House Minority Leader Nancy Pelosi will huddle with Obama at the White House on Friday for the first face-to-face meeting of the group this year.

"There are no preconditions to a meeting like this," White House spokesman Jay Carney said today. "The immediate purpose of the meeting is to discuss the imminent sequester deadline and to avert it."

Even if the leaders reach a deal, there's almost no chance a compromise could be enacted before the deadline. Lawmakers are expected to recess later today for a long weekend in their districts.

What will be the short-term impact of the automatic cuts?

Officials say it will be a gradual, "rolling impact" with limited visible impact across the country in the first few weeks that the cuts are allowed to stand.

Over the long term, however, the Congressional Budget Office and independent economic analysts have warned sequester could lead to economic contraction and possibly a recession.

"This is going to be a big hit on the economy," Obama said Wednesday night.

"It means that you have fewer customers with money in their pockets ready to buy your goods and services. It means that the global economy will be weaker," he said. "And the worst part of it is, it's entirely unnecessary."

Both sides say that if the cuts take effect, the next best chance for a resolution could come next month when the parties need to enact a new federal budget. Government funding runs out on March 27, raising the specter of a federal shutdown if they still can't reach a deal.

"As we anticipate an across-the-board budget cuts across our land, we still expect to see your goodness prevail, O God, " Senate Chaplain Barry Black prayed on the Senate floor this morning, "and save us from ourselves."

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Low-key departure as pope steps down and hides away

VATICAN CITY (Reuters) - Pope Benedict slips quietly from the world stage on Thursday after a private last goodbye to his cardinals and a short flight to a country palace to enter the final phase of his life "hidden from the world".

In keeping with his shy and modest ways, there will be no public ceremony to mark the first papal resignation in six centuries and no solemn declaration ending his nearly eight-year reign at the head of the world's largest church.

His last public appearance will be a short greeting to residents and well-wishers at Castel Gandolfo, the papal summer residence south of Rome, in the late afternoon after his 15-minute helicopter hop from the Vatican.

When the resignation becomes official at 8 p.m. Rome time (02.00 p.m. EST), Benedict will be relaxing inside the 17th century palace. Swiss Guards on duty at the main gate to indicate the pope's presence within will simply quit their posts and return to Rome to await their next pontiff.

Avoiding any special ceremony, Benedict used his weekly general audience on Wednesday to bid an emotional farewell to more than 150,000 people who packed St Peter's Square to cheer for him and wave signs of support.

With a slight smile, his often stern-looking face seemed content and relaxed as he acknowledged the loud applause from the crowd.

"Thank you, I am very moved," he said in Italian. His unusually personal remarks included an admission that "there were moments ... when the seas were rough and the wind blew against us and it seemed that the Lord was sleeping".

CARDINALS PREPARE THE FUTURE

Once the chair of St Peter is vacant, cardinals who have assembled from around the world for Benedict's farewell will begin planning the closed-door conclave that will elect his successor.

One of the first questions facing these "princes of the Church" is when the 115 cardinal electors should enter the Sistine Chapel for the voting. They will hold a first meeting on Friday but a decision may not come until next week.

The Vatican seems to be aiming for an election by mid-March so the new pope can be installed in office before Palm Sunday on March 24 and lead the Holy Week services that culminate in Easter on the following Sunday.

In the meantime, the cardinals will hold daily consultations at the Vatican at which they discuss issues facing the Church, get to know each other better and size up potential candidates for the 2,000-year-old post of pope.

There are no official candidates, no open campaigning and no clear front runner for the job. Cardinals tipped as favorites by Vatican watchers include Brazil's Odilo Scherer, Canadian Marc Ouellet, Ghanaian Peter Turkson, Italy's Angelo Scola and Timothy Dolan of the United States.

BENEDICT'S PLANS

Benedict, a bookish man who did not seek the papacy and did not enjoy the global glare it brought, proved to be an energetic teacher of Catholic doctrine but a poor manager of the Curia, the Vatican bureaucracy that became mired in scandal during his reign.

He leaves his successor a top secret report on rivalries and scandals within the Curia, prompted by leaks of internal files last year that documented the problems hidden behind the Vatican's thick walls and the Church's traditional secrecy.

After about two months at Castel Gandolfo, Benedict plans to move into a refurbished convent in the Vatican Gardens, where he will live out his life in prayer and study, "hidden to the world", as he put it.

Having both a retired and a serving pope at the same time proved such a novelty that the Vatican took nearly two weeks to decide his title and form of clerical dress.

He will be known as the "pope emeritus," wear a simple white cassock rather than his white papal clothes and retire his famous red "shoes of the fisherman," a symbol of the blood of the early Christian martyrs, for more pedestrian brown ones.

(Reporting By Tom Heneghan; editing by Philip Pullella and Giles Elgood)

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Sony sells Tokyo office building for US$1.2b

TOKYO: Sony said on Thursday it has sold one of its main buildings in Tokyo for US$1.2 billion as the embattled Japanese electronics giant offloads assets to help repair its tattered balance sheet.

The news comes after the company in January announced the sale of its US headquarters in Manhattan for more than US$1.0 billion while this month it also sold part of its online medical services unit.

Sony said its had sold the 25-storey central Tokyo building, which houses its television unit, to Nippon Building Fund and an unnamed Japanese institutional investor for 111 billion yen (US$1.2 billion) and would earn it a profit of 41 billion yen.

"Sony is transforming its business portfolio and reorganising its assets in an effort to strengthen its corporate structure," the company said in a statement. "This sale was conducted as a part of this reorganisation."

Sony said it would remain in the central Tokyo building for five years under a leasing agreement.

Earlier this month, the firm said it would book a US$1.2-billion gain from selling part of an online medical services unit, as it eyes a full-year profit after four years in the red.

Sony has announced a massive corporate overhaul that includes thousands of job cuts, the sale of a chemical division and an investment in Olympus to tap the camera and medical equipment maker's strong foothold in the global market for endoscopes.

The maker of Bravia televisions and PlayStation games consoles lost 456.66 billion yen in the last fiscal year, but says it is on track for a 20-billion-yen net profit in the year to March.

Last week, Sony announced it would launch its PlayStation 4 system as it faces increasing competition from cheap -- or sometimes free -- downloadable video games for smartphones and tablets.

The company's hard times saw its stock value tumble below 1,000 yen a share last year, for the first time since the era of the Walkman.

The stock has since come back, with Sony shares up 3.56 per cent at 1,338 yen on Thursday in Tokyo.

Japan's electronics sector has suffered a myriad of problems, including a strong yen, slowing demand in key export markets, fierce competition especially in the struggling TV division and strategic mistakes.

The industry has been awash in huge losses and credit rating downgrades, with rival Sharp saying last year it would put up real estate as collateral for bank loans -- including its Osaka headquarters -- to stay afloat.

- AFP/xq

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Landslide victory for Left in Tripura, Cong to retain power in Meghalaya

AGARTALA: Tripura's ruling Communist Party of India-Marxist (CPI-M) led Left Front was Thursday heading for a landslide victory and set to retain power for a fifth straight term.

In a virtual status quo, the ruling formations were ahead and appeared to be romping back to power in the assembly elections in Tripura, Nagaland and Meghalaya where counting of votes was taken up on Thursday.
TRIPURA

PARTY	LEADS	WINS
CONGRESS	5	5
CPM	13	35
CPI	1	1

MEGHALAYA

PARTY	LEADS	WINS
CONGRESS	26	2
UDP	4	2
NCP	2	0
National People's Party	2	0
Hill state People's Democratic party	4	0
Others	11	0

NAGALAND

PARTY	LEADS	WINS
CONGRESS	3	1
Janata Dal(United)	1	0
NPF	10	20
NCP	2	2
Rashtriya Janata Dal	1	0
Others	5	3

The Left Front government is set to come back to power for the fifth consecutive term in Tripura with leader of the coalition CPM leading in 32 of the 60 seats while its ally CPI was ahead in one.

Congress was a poor second leading only in four seats and others in one in the trends available so far.

In Meghalaya, the ruling Congress-UDP coalition is ahead in 14 of the 60 seats. Congress was ahead in 9 and its alliance partner UDP in 5.

Nagaland also continued with the same trend of favouring the ruling combination.

The Naga Peoples Front (NPF) was ahead in 15 seats while the Congress was ahead in 4, JD(U) 1 and others 2 in the 60-member assembly.

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Medicare paid $5.1B for poor nursing home care

SAN FRANCISCO (AP) — Medicare paid billions in taxpayer dollars to nursing homes nationwide that were not meeting basic requirements to look after their residents, government investigators have found.

The report, released Thursday by the Department of Health and Human Services' inspector general, said Medicare paid about $5.1 billion for patients to stay in skilled nursing facilities that failed to meet federal quality of care rules in 2009, in some cases resulting in dangerous and neglectful conditions.

One out of every three times patients wound up in nursing homes that year, they landed in facilities that failed to follow basic care requirements laid out by the federal agency that administers Medicare, investigators estimated.

By law, nursing homes need to write up care plans specially tailored for each resident, so doctors, nurses, therapists and all other caregivers are on the same page about how to help residents reach the highest possible levels of physical, mental and psychological well-being.

Not only are residents often going without the crucial help they need, but the government could be spending taxpayer money on facilities that could endanger people's health, the report concluded. The findings come as concerns about health care quality and cost are garnering heightened attention as the Obama administration implements the nation's sweeping health care overhaul.

"These findings raise concerns about what Medicare is paying for," the report said.

Investigators estimate that in one out of five stays, patients' health problems weren't addressed in the care plans, falling far short of government directives. For example, one home made no plans to monitor a patient's use of two anti-psychotic drugs and one depression medication, even though the drugs could have serious side effects.

In other cases, residents got therapy they didn't need, which the report said was in the nursing homes' financial interest because they would be reimbursed at a higher rate by Medicare.

In one example, a patient kept getting physical and occupational therapy even though the care plan said all the health goals had been met, the report said.

The Office of Inspector General's report was based on medical records from 190 patient visits to nursing homes in 42 states that lasted at least three weeks, which investigators said gave them a statistically valid sample of Medicare beneficiaries' experiences in skilled nursing facilities.

That sample represents about 1.1 million patient visits to nursing homes nationwide in 2009, the most recent year for which data was available, according to the review.

Overall, the review raises questions about whether the system is allowing homes to get paid for poor quality services that may be harming residents, investigators said, and recommended that the Centers for Medicare & Medicaid Services tie payments to homes' abilities to meet basic care requirements. The report also recommended that the agency strengthen its regulations and ramp up its oversight. The review did not name individual homes, nor did it estimate the number of patients who had been mistreated, but instead looked at the overall number of stays in which problems arose.

In response, the agency agreed that it should consider tying Medicare reimbursements to homes' provision of good care. CMS also said in written comments that it is reviewing its own regulations to improve enforcement at the homes.

"Medicare has made significant changes to the way we pay providers thanks to the health care law, to reward better quality care," Medicare spokesman Brian Cook said in a statement to AP. "We are taking steps to make sure these facilities have the resources to improve the quality of their care, and make sure Medicare is paying for the quality of care that beneficiaries are entitled to."

CMS hires state-level agencies to survey the homes and make sure they are complying with federal law, and can require correction plans, deny payment or end a contract with a home if major deficiencies come to light. The agency also said it would follow up on potential enforcement at the homes featured in the report.

Greg Crist, a Washington-based spokeswoman for the American Health Care Association, which represents the largest share of skilled nursing facilities nationwide, said overall nursing home operators are well regulated and follow federal guidelines but added that he could not fully comment on the report's conclusions without having had the chance to read it.

"Our members begin every treatment with the individual's personal health needs at the forefront. This is a hands-on process, involving doctors and even family members in an effort to enhance the health outcome of the patient," Crist said.

Virginia Fichera, who has relatives in two nursing homes in New York, said she would welcome a greater push for accountability at skilled nursing facilities.

"Once you're in a nursing home, if things don't go right, you're really a prisoner," said Fichera, a retired professor in Sterling, NY. "As a concerned relative, you just want to know the care is good, and if there are problems, why they are happening and when they'll be fixed."

Once residents are ready to go back home or transfer to another facility, federal law also requires that the homes write special plans to make sure patients are safely discharged.

Investigators found the homes didn't always do what was needed to ensure a smooth transition.

In nearly one-third of cases, facilities also did not provide enough information when the patient moved to another setting, the report found.

___

On the Web:

The OIG report: http://1.usa.gov/VaztQm

The Medicare nursing home database: http://www.medicare.gov/NursingHomeCompare/search.aspx?bhcp=1&AspxAutoDetectCookieSupport=1

___

Follow Garance Burke on Twitter at —http://twitter.com/garanceburke.

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Arias Prosecutor Too Combative, Experts Say

He has barked, yelled, been sarcastic and demanded answers from accused murderer Jodi Arias this week.

And in doing so, prosecutor Juan Martinez and his aggressive antics may be turning off the jury he is hoping to convince that Arias killed her ex-boyfriend Travis Alexander in June 2008, experts told ABCNews.com today.

"Martinez is his own worst enemy," Mel McDonald, a prominent Phoenix defense attorney and former judge, told ABC News. "He takes it to the point where it's ad nauseam. You have difficulty recognizing when he's driving the point home because he's always angry and pushy and pacing around the courtroom. He loses the effectiveness, rather than build it up."

"He's like a rabid dog and believes you've got to go to everybody's throat," he said.

"If they convict her and give her death, they do it in spite of Juan, not because of him," McDonald added.

Martinez's needling style was on display again today as he pestered Arias to admit that she willingly participated in kinky sex with Alexander, though she previously testified that she only succumbed to his erotic fantasies to please him.

Arias, now 32, and Alexander, who was 27 at the time of his death, dated for a year and continued to sleep together for another year following their break-up.

Arias drove to his house in Mesa, Ariz., in June 2008, had sex with him, they took nude photos together and she killed him in his shower. She claims it was in self-defense. If convicted, Arias could face the death penalty.

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Martinez also attempted to point out inconsistencies in her story of the killing, bickering with her over details about her journey from Yreka, Calif., to Mesa, Ariz., including why she borrowed gas cans from an ex-boyfriend, when she allegedly took naps and got lost while driving, and why she spontaneously decided to visit Alexander at his home in Mesa for a sexual liaison.

"I want to know what you're talking about," Arias said to Martinez at one point.

"No, I'm asking you," he yelled.

Later, he bellowed, "Am I asking you if you're telling the truth?"

"I don't know," Arias said, firing back at him. "Are you?"

During three days of cross examining Arias this week, Martinez has spent hours going back and forth with the defendant over word choice, her memory, and her answers to his questions.

"Everyone who takes witness stand for defense is an enemy," McDonald said. "He prides himself on being able to work by rarely referring to his notes, but what he's giving up in that is that there's so much time he wastes on stupid comments. A lot of what I've heard is utterly objectionable."

Martinez's behavior has spurred frequent objections of "witness badgering" from Arias' attorney Kirk Nurmi, who at one point Tuesday stood up in court and appealed to the judge to have a conference with all of the attorneys before questioning continued. Judge Sherry Stephens at one point admonished Martinez and Arias for speaking over one another.

Andy Hill, a former spokesperson for the Phoenix police department, and Steven Pitt, a forensic psychiatrist who has testified as an expert witness at many trials in the Phoenix area, both said that despite his aggressive style, Martinez would likely succeed in obtaining a guilty verdict.

"When it comes to cross examination, one size does not fit all," said Pitt. "But if you set aside the incessant sparring, what the prosecutor I believe is effectively doing is pointing out the various inconsistencies in the defendant's version of events."

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Australian cyclone crossing Western Australian coast

SYDNEY: A tropical cyclone hit Australia's resource-rich northwest coast Wednesday, bringing winds of up to 165 kilometres (102 miles) an hour as it crossed the shore near the tiny community of Pardoo.

Severe tropical cyclone Rusty had been sitting offshore for several days, slowly intensifying as it edged towards the Pilbara coast and bringing heavy rain and gale-force winds to the iron ore region.

"It is in the process of crossing," Neil Bennett from Australia's Bureau of Meteorology told AFP just after 0700 GMT, adding it was too soon to say whether it had caused any damage.

"Wind gusts in excess of 165 kilometres an hour are in that area."

Bennett said the storm had been downgraded from a category 4 storm, just one notch short of the top category, to a category 3.

The bureau had expected Rusty to make landfall close to Port Hedland, 1,300 kilometres (800 miles) north of Perth, but Bennett said the major iron ore port appeared to have escaped the full brunt of the storm.

"It looks as if Hedland has dodged the bullet, so to speak, because the worst of the winds are away from Hedland," he said.

"Hedland though has been experiencing a constant period of gale-force winds for over 36 hours now. And that's unprecedented (for that area)."

While the storm has been downgraded, its eye has also contracted from being about 80 kilometres wide on Tuesday to about 50 kilometres by the time it crossed land.

Authorities had warned residents to move out of the storm's path or seek shelter. Resident Ian Badger said he was seeking refuge at the Pardoo Roadhouse, about 120 kilometres from Port Hedland.

"It's just a matter of hanging on," he told the Australian Broadcasting Corporation.

"The amount of water that's around is a bit worrying. The ground is very sodden, very soft. As soon as you get a get a bit of strong wind, trees start going over."

The weather bureau expects the cyclone to move slowly in a south-southeasterly direction, gradually downgrading to a category 1 storm by Thursday afternoon and a tropical low the following day.

Australia's major iron ore export ports have been shut for several days anticipating Rusty's approach. Hundreds of people have been forced to evacuate their homes in the sparsely populated but cyclone-prone area.

Global iron ore giants including BHP Billiton, Rio Tinto and Fortescue Metals Group have all shut down or scaled back operations due to the storm.

-AFP/fl

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Ruckus in Rajya Sabha over alleged tapping of Arun Jaitley's phone

NEW DELHI: The issue of the alleged tapping of the phone of Rajya Sabha leader of opposition Arun Jaitley created a ruckus in the upper House on Wednesday morning.

Rajya Sabha chairman M Hamid Ansari was forced to adjourn the House briefly.

As soon as the House met for the day, Samajwadi Party leader Naresh Agarwal stood up and raised the issue.

"It is a matter of concern that the leader of opposition's phone is being tapped, we need an answer from the home minister," Agarwal said.

He was joined by members of the Bharatiya Janata Party (BJP), Bahujan Samaj Party (BSP), Janata Dal (United) and AIADMK.

Ravishankar Prasad of BJP, Satish Chandra Misra of BSP, AIADMK's V Maitreyan, and Shivanand Tiwari of JD(U) were among those who stood up demanding a clarification from the government on the issue.

Minister of state for parliamentary affairs Rajiv Shukla then assured them that the home minister would inform the house on the issue. The agitated members, however, were not pacified by this and sought a timeframe for the government's response.

Members sought to know if the government was involved in the phone tapping, to which Shukla responded: "The government does not do such things."

This led to uproar from the opposition benches which forced the chairman to order a brief adjournment.

When the House reassembled after the five-minute adjournment, home minister Sushilkumar Shinde said he would collect information on the matter and place it before the House soon.

"Government is bound to make a statement on this," Shinde said.

With that, the proceedings of the House continued smoothly and question hour was taken up.

The Delhi Police has arrested Anurag Singh, a doctor-turned-private detective, who runs V-Detect Private Detective Agency in New Delhi. He is believed to be the brain behind the move to acquire Jaitley's phone call details.

Anurag Singh is also one of the main accused in the tapping of the phone of former Samajwadi Party leader Amar Singh.

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Inside Organized Retail Crime Raids

We used to call it shoplifting, but these days the foot soldiers of retail crime rings are known as boosters. Police even have an acronym for these operations: ORC, which stands for Organized Retail Crime.

"It's just like a Fortune 500 company," said Sergeant Eric Lee of the Gardena Police Department in Gardena, Calif. "All of this is just organized."

Watch the full story on "Nightline" TONIGHT at 12:35 a.m. ET

Police say big retail stores, from Walgreens to J.C. Penny, are getting hit by highly sophisticated shoplifting networks that steal and resell everything from underwear to razors to milk. According to the National Retail Federation, theft can amount to annual losses as high as a $37 billion for retail businesses.

"Every store in every city has to go through this," Lee said. "They wait until no one's paying attention and they walk out."

Tide detergent is currently a hot target because it is compact, expensive and easy to sell on the streets for profit, police said. The Street name: "liquid gold."

"Sometimes we get rings that just do alcohol," Lee said. "And then we get some that do just meat and seafood."

Investigators say boosters move the loot for cents on the dollar to fencing operations -- the black market resellers of the stolen goods -- which sell the stolen merchandise in plain sight in stores. Boosters, fencers, Mr. Bigs, all of those involved in these shoplifting operations can potentially make millions a year from boosting and re-selling stolen goods.

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And Mike Swett is on the case. A former Riverside County sheriff's deputy in Los Angeles, Swett was badly injured in a car wreck and now works as a full-time private investigator on the ORC beat who has worked with Target, Marshalls, T.J. Maxx. Stores hire him to do his own undercover police work, catching thieves before involving local law enforcement.

"Kind of like working a narcotics case, it's like you've got low-level, mid-level and then top dog," Swett said. "We like to go after the top dog and the only way to get to the top dog is mid-level first."

At his command center -- his apartment -- Swett showed off the boxes upon boxes of tapes and photographs he has collected, the fruits of countless silent stake-out hours.

Swett said he has been casing two joints in L.A. for months, both alleged to be mid-level fencing operations. "Nightline" was invited to ride along with him when he sent undercover agents in for a final reconnaissance mission.

At some stores and shopping malls, clerks do little to stop shoplifters and often let them run, which has contributed to the growing fencing operations.

"[The stores] don't want their employees to get injured," Swett said. "So oftentimes they will call the police, but by the time we get there they are already in their car and they are gone."

This leaves professional investigators like Swett to put the pieces together and bust open the gangs to lead over-stretched police departments to the prey.

When raid day arrived, a motorcade of squad cars departed from the Gardena, Calif., police department and pulled up to one fencing operation. Swett said the merchandise being sold was boosted goods.

"There is Victoria's Secret, expensive Victoria's Secret, the gift sets," he said, pointing down a line of tables. "J.C. Penny, Miramax, its real stuff not counterfeit."

He spotted a bottle of Katy Perry brand perfume, which usually retails for around $90 but one seller had it priced at $59.

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Italy faces stalemate after election shock

ROME (Reuters) - Italy faced political deadlock on Tuesday after a stunning election that saw the anti-establishment 5-Star Movement of comic Beppe Grillo become the strongest party in the country but left no group with a clear majority in parliament.

"The winner is: Ingovernability" was the headline in Rome newspaper Il Messaggero, reflecting the stalemate the country would have to confront in the next few weeks as sworn enemies would be forced to work together to form a government.

The center-left coalition led by Pier Luigi Bersani won the lower house by around 125,000 votes, where it will have a majority because of a premium given to the largest party or coalition.

Results in the upper house Senate indicated the center-left would end up with about 119 seats, compared with 117 for the center-right. Seats are awarded on a region-by-region basis in the Senate, where a majority of 158 is needed to govern.

Any coalition must have a working majority in both houses in order to pass legislation.

Bersani claimed victory but said it was obvious that Italy was in "a very delicate situation".

Neither Grillo, a comedian-turned-politician who previously ruled out any alliance with another party, nor Silvio Berlusconi's center-right bloc, which threatened to challenge the close tally, showed any immediate willingness to negotiate.

Commentators said all of Grillo's adversaries had underestimated the appeal of a grassroots movement that called itself a "non-party", particularly its allure among young Italians who find themselves without jobs and the prospect of a decent future.

The 5-star Movement's score of 25.5 percent in the lower house was just ahead of the 25.4 percent for Bersani's Democratic Party, which ran in a coalition with the leftist SEL party, and it won almost 8.7 million votes overall - more than any other single party.

FRUSTRATED GENERATION

"The 'non-party' has become the largest party in the country," said Massimo Giannini, commentator for the Rome newspaper La Repubblica.

World financial markets reacted nervously to the prospect of a government stalemate in the euro zone's third-largest economy with memories still fresh of the financial crisis that took the 17-member currency bloc to the brink of collapse in 2011.

The euro skidded to an almost seven-week low against the dollar in Asia on fears about the euro zone's debt crisis. It fell as far as $1.3042, its lowest since January 10.

A first indication of investors' reaction to the results will come later on Tuesday when the Treasury auctions 8.75 billion euros in 6-month bonds.

Italy's borrowing costs have come down in recent months, helped by the promise of European Central Bank support but the election result confirmed fears of many European countries that it would not produce a government strong enough to implement effective reforms.

Grillo's surge in the final weeks of the campaign threw the race open, with hundreds of thousands turning up at his rallies to hear him lay into targets ranging from corrupt politicians and bankers to German Chancellor Angela Merkel.

In just three years, his 5-Star Movement, heavily backed by a frustrated generation of young Italians increasingly shut out from permanent full-time jobs, has grown from a marginal group to one of the most talked about political forces in Europe.

"The 5-Star Movement is the real winner of the election," said SEL leader Nichi Vendola, who said that his coalition would have to deal with Grillo, who mixes fierce attacks on corruption with policies ranging from clean energy to free Internet.

RECESSION

"It's a classic result. Typically Italian," said Roberta Federica, a 36-year-old office worker in Rome. "It means the country is not united. It is an expression of a country that does not work. I knew this would happen."

A long recession and growing disillusionment with mainstream parties fed a bitter public mood that saw more than half of Italian voters back parties that rejected the austerity policies pursued by Prime Minister Mario Monti with the backing of Italy's European partners.

Monti suffered a major setback. His centrist grouping won only 10.6 percent and two of his key centrist allies, Pier Ferdinando Casini and lower house speaker Gianfranco Fini, both of parliamentarians for decades, were booted out.

"It's not that surprising if you consider how much delusion there was with politics in its traditional forms," Monti said.

Berlusconi's campaign, mixing sweeping tax cut pledges with relentless attacks on Monti and Merkel, echoed many of the themes pushed by Grillo and underlined the increasingly angry mood of the Italian electorate.

Stefano Zamagni, an economics professor at Bologna University said the result showed that a significant share of Italians "are fed up with following the austerity line of Germany and its northern allies".

"These people voted to stick one up to Merkel and austerity," he said.

Even if the next government turns away from the tax hikes and spending cuts brought in by Monti, it will struggle to revive an economy that has scarcely grown in two decades.

Monti was widely credited with tightening Italy's public finances and restoring its international credibility after the scandal-plagued Berlusconi, whom he replaced as the 2011 financial crisis threatened to spin out of control.

But he struggled to pass the kind of structural reforms needed to improve competitiveness and lay the foundations for a return to economic growth, and a weak center-left government may not find it any easier.

(Writing by Philip Pullella; Additional reporting by Barry Moody, Gavin Jones, Catherine Hornby and Naomi O'Leary; Editing by Pravin Char)

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