TWO of Europe’s biggest countries faced turmoil last night after voters gave neither Left nor Right a decisive advantage in Italy’s general election and President Chirac’s Government was forced to abandon its bitterly contested labour reforms in France.

Italy faced chaos and confusion as early projections showed neither Silvio Berlusconi’s centre-right alliance nor Romano Prodi’s centre-left coalition had secured a clear victory.

The two blocs were neck and neck in both the Lower and Upper Houses, but Signor Berlusconi’s bloc was gaining ground late last night. An Italian prime minister needs to win both to govern effectively. A split result could mean fresh elections.

Early exit polls proved to be wrong in predicting a clear victory for Signor Prodi, the former European Commission President, as Signor Berlusconi, whose five years in power have been dogged by economic stagnation and allegations of corruption, steadily gained ground during the count.

In both camps jubilation jostled with dismay. It was conceivable that the new government could be determined by the 12 MPs and six senators elected by a million Italians living overseas.

In France, M Chirac ordered Dominique de Villepin, his handpicked Prime Minister, to beat a humiliating retreat on his youth employment legislation after three months of strikes and huge street protests.

The upheavals in two of the European Union’s four biggest countries will have repercussions far beyond their borders.

Signor Berlusconi has been pro-American, Eurosceptic, and an ally of President Bush and Tony Blair on Iraq and other issues. Under Signor Prodi Italy would favour Brussels over Washington and accelerate the withdrawal of Italian troops from Iraq. A sustained period of political paralysis would further postpone efforts to revive Italy’s sick economy.

Most analysts agreed that M Chirac’s capitulation marked the end of any serious attempts to reform France’s restrictive labour laws before the presidential election in 2007.

It renders him a lame duck for the rest of his second term and seriously damages M de Villepin’s chances of succeeding him, leaving the Prime Minister’s old rival Nicolas Sarkozy the clear favourite to be the Centre Right’s presidential candidate. However, the real victors were the socialists whose hopes of winning back the Elysée Palace have soared.

M de Villepin had gambled his political future on ramming through legislation designed to cut youth unemployment by allowing workers under 26 to be sacked without reason during a two-year trial period. Looking weary, he appeared on television to announce the scrapping of his First Employment Contract (CPE) in the face of massive protests by students, trade unions and the Left. “The necessary conditions of confidence and calm are not there,” he said.

“I wanted to propose a strong solution to break with unemployment in our country. That was not understood by everyone. I regret it.”

The Government said the CPE would be replaced by a more orthodox French measure to provide subsidies of 300 million euros (£200 million) a year to companies taking on young people.

Since the student riots of 1968, French governments have repeatedly capitulated in the face of sustained street protests. As recently as last week M de Villepin had insisted that his Government would stand firm, but his approval rating has slumped to just 25 per cent and after yesterday’s U-turn the prospect of him resigning was being openly discussed.

M Chirac’s standing is equally dismal. He has been unable to impose order on a troubled country, or even on a government split by internal conflicts. Twice before in his long career he has been defeated by street protests, and he had been reluctant to take on France’s powerful student and workers’ unions again. But he was convinced by M de Villepin, who said the ‘ easy hire, easy fire’ contract was a tool in the fight against a youth employment rate of almost 23 per cent.

In the event opponents depicted the CPE as a symbol of Anglo-Saxon “ultra-liberalism” which threatened the very essence of French identity.

Times Recommends

• Mandela’s tribe threatens President Zuma
• The French empire strikes back
• Wife of cheating governor exacts a political revenge