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Shares recover as election fears prove short-lived

European shares finished higher as investor concerns about government austerity plans following weekend election results proved short-lived.

Pro-bailout parties in Greece performed poorly, while Francois Hollande won the French presidency, promising to focus more on growth rather than austerity.

In Paris, the Cac 40 recovered to trade up by 1.65%. In Germany, the Dax fell by more than 2%, but closed up 0.1%.

The euro also fell against both the dollar and the pound.

The euro fell as low as $1.295, its lowest since January, later recovering to $1.305, and dropped to three-year lows against the pound.

But shares in Athens fell by as much as 8.3%. In London, markets were closed for a bank holiday.

In New York, the Dow Jones opened down by 0.3%.

The interest rates on some government debt has also gone up, indicating a fall in investor confidence. The yield in the secondary markets for Greek 10-year bonds has gone up from 20% to 22.2%.

Asian markets also fell, with the Nikkei in Tokyo dropping 2.8%. South Korea's Kospi shed 1.8% and Hong Kong's Hang Seng dropped 2.4%.

'Chaos in Greece'

In Greece, the socialist Pasok party saw an unexpectedly poor result, while Syriza, which has opposed austerity measures, had a strong performance.

The result has cast doubt on whether the country's policies that currently include large spending cuts, tax increases and state job losses, can continue.

"The knee-jerk reaction was a little strong, but there's chaos in Greece, and [politicians] being against the deal that was already agreed upon is almost like progress being set back a year and a half," said Scott Freeze, president of StreetOne Financial.

BBC Europe editor Gavin Hewitt says Greece faces political turmoil.

"Pro-austerity parties were punished at the polls. The country will struggle to form a coalition that has the support in parliament for new spending cuts that are a pre-condition for receiving funds from a bailout," he said.

"There will be fresh doubts as to whether Greece can remain in the euro. The new political reality in Europe is that voters appear no longer willing to accept spending cuts, low growth and unemployment."

'No renegotiation'

While the French result was expected, there is still concern about whether Mr Hollande will be able to work as closely with German Chancellor Angela Merkel as his predecessor Nicolas Sarkozy did.

The two were the driving force behind the eurozone's fiscal compact.

Mr Hollande stood on a platform of promoting growth rather than concentrating on austerity.

"The global financial markets aren't thrilled by the idea that France and Greece have voted for governments less willing to work with the Germans on a consistent approach to addressing their fiscal deficits," said Dick Green at Briefing.com.

During the campaign, Mr Hollande pledged to renegotiate the fiscal pact in which European countries agreed to strict controls on their budgets.

But following his victory, and the defeat of the governing coalition parties in Greece, Mrs Merkel said that the deal was "not up for grabs".

"It is a matter of principle in Europe that following elections, be they in small or large countries, we do not renegotiate what's already been agreed," she said.

"Otherwise we could not work together in Europe."

The ratings agency Standard and Poor's, which downgraded France from its triple-A rating in January, said the election result would have no immediate impact on its credit status.

"We will analyse the policy choices of France's president elect and the new government, taking into account the outcome of the parliamentary elections in June," the agency said.

"The chances are that the next move is going to be down. The chances are it's going to be slightly earlier than it would have been otherwise, but the agencies themselves will have a measured response," said Georg Grodski, head of credit research at Legal and General.

"There is still hope that Mr Hollande will tone down some of his rhetoric and accept that you can't fix an economic problem by living on other people's money."