* FTSEurofirst 300 down 0.6 pct, FTSE MIB down 2.5 pct
* Threat of government crisis fuels profit taking on Italian
* Morgan Stanley expects pullback of up to 10 pct as Fed
By Francesco Canepa
LONDON, Aug 19 (Reuters) - Italian shares led European
bourses lower on Monday as reports of a rift opening up in
Rome's coalition government triggered some profit taking on the
region's best-performing index in the past month.
Italy's FTSE MIB index fell 2.5 percent, as traders
cashed in on its recent 14 percent rise, after reports that
Silvio Berlusconi's centre-right party may withdraw its vital
support from the government if he is expelled from the Senate
following his recent conviction for tax fraud.
Prime Minister Enrico Letta warned on Sunday that the
collapse of his government would undermine the nascent economic
recovery in Italy, which has helped the FTSE MIB outperform all
other indexes in the region in the past month.
Volume on the FTSE MIB was 126 percent of its 90-day
average, compared to a meagre 73 percent for the pan-European
FTSEurofirst 300, which fell 0.6 percent to 1,224.58
"The market is betting that we're going to have a bout of
uncertainty," said Ugo De Pasquale, an option trader with Qubed
"Italy needs the coalition government to stay in power.
That's what the market is telling us."
Italian lenders UniCredit and Intesa Sanpaolo
shed 5.2 percent and 4.1 percent, their biggest daily
losses since June after hitting six- and 18-months highs on
Traders said a nearly 30 percent rally in Italian banking
shares in the previous month, fuelled by some
better-than-expected economic data against very low valuations,
magnified the extent of the profit taking on Monday
Short interest in Intesa Sanpaolo and UniCredit, a gauge of
interest from speculative sellers, was hovering around a
one-year trough last week, Markit data showed, and the cost of
insuring against future swings in both stocks recently hit its
low for the year, showing sentiment around the shares was at its
Around Europe, Britain's FTSE 100 fell 0.5 percent,
France's Cac shed 1 percent and Germany's Dax
fell 0.3 percent.
Investors were positioning for a reduction in the U.S.
Federal Reserve's asset-purchase programme, which along with
other, similar central bank schemes around the world has helped
the FTSEurofirst 300 rise 30 percent since June 2012.
Traders will look for hints on when the Fed might start
cutting back its quantitative easing programme when the minutes
of the July policy meeting are published on Wednesday.
"In the past, when markets started to price in a change in
the monetary policy cycle, you tended to see a pause in the
market or a bit of a correction," said Ronan Carr, a strategist
at Morgan Stanley, who expected European indexes to pull back as
much as 10 percent in the near term.
"It doesn't necessarily derail the favourable outlook which
is defined by improving growth but we think it will cause some
indigestion in the near term."