April 20 (Bloomberg) -- Italian consumer confidence declined to a six-month low on concern the closest national election ever will result in a government incapable of stimulating economic growth.

An index based on a poll of 2,000 households by the Isae Institute fell to 106.1, its lowest level since October, from a revised 109.1 in March. Isae prepared the report in the first two weeks of the month, straddling the April 9-10 election.

Prime Minister Silvio Berlusconi refused to concede even after Italy's highest appeals court yesterday certified former European Commission President Romano Prodi's victory by less than 25,000 votes. The impasse, and Prodi's thin majority in parliament, may complicate his efforts to tame the budget deficit and stimulate growth after Europe's fourth-largest economy stalled last year.

``A fair bit of dust still has to settle, but the elections may even have dampened prospects for the future,'' said Sean Maloney, a European economist at Informa Global Markets in London. ``One just has to look at the numbers to see that Italy is still the sick man of Europe.''

Double Recession

The drop in Italian confidence contrasts with growing optimism in the euro region's biggest economies. German business confidence unexpectedly rose to the highest in 15 years in March. French consumer spending in February jumped the most since October 2004, and consumer confidence climbed for a third month.

Italy's benchmark S&P/MIB index advanced 0.6 percent to 38,284 at 2:20 p.m. in Milan, taking back some of the declines since the vote. The index has fallen 0.5 percent since the election, while the Dow Jones Stoxx 50 index gained 0.3 percent.

The premium, or spread, that investors demand to buy Italy's benchmark 10-year bond rather than the German bond of similar maturity widened to 32 basis points today, the highest in more than 4 years. A basis point is 0.01 percent point.

``Investors and consumers alike are going to be looking for as much clarity on the situation as possible as soon as possible,'' said Antonio Cesarano, an economist at MPS Finance BM in Siena, Italy.

Under Berlusconi, Italy's $1.7 trillion economy slipped into recession twice in two years, and growth is set to lag behind that of the euro region for a fifth year in 2006. Berlusconi managed to draw almost even in the vote by convincing the public that Prodi's plans to stimulate the economy and tame the deficit would require higher taxes.

Tax Increases

Prodi has pledged to raise capital-gains taxes and resurrect an inheritance tax to help finance his plan to cut payroll expenses and fuel economic growth.

The International Monetary Fund yesterday raised its forecast for growth in the euro zone, while cutting the prediction for Italy. The lender expects the euro-region economy to expand 2 percent this year, compared with the 1.8 percent predicted in September. Italy will grow 1.2 percent, less than the 1.4 percent forecast previously.

The IMF also said that the European Central Bank shouldn't ``rush'' to raise interest rates as inflation remain ``subdued'' and consumer spending ``fragile.''

Oil Prices

``Pessimism about the short-term evolution of the economic situation in the country has heightened,'' Isae said in today's report. A measure of concern over the short-term prospects for the economy fell to minus 20 from minus 13 last month.

``The election results clearly had a much more negative effect on sentiment than we'd expected,'' said Marco Valli, an economist at UniCredit Banca Mobiliare SpA in Milan. ``We also can't ignore the significant effect of record oil prices on consumers' pockets.''

Crude oil was trading above $72 a barrel for the second day in New York, hitting all-time highs over the past two days. Oil for May delivery traded at $72.13 a barrel, down 4 cents, in after-hours electronic trading at 2:30 p.m. Singapore time.

Oil has jumped 18 percent this year and ECB Chief Economist Otmar Issing said in an interview in the International Herald Tribune today that higher crude prices will likely to push up the bank's inflation forecasts.

In Italy, signs of optimism about employment may lead to an improved outlook among consumers. ``Expectation for the labor market are more favorable,'' Isae said. Italy's unemployment rate in the fourth quarter held at the lowest in more than 10 years.

Growth Increasing

A measure of concern about unemployment fell to 36, its lowest since October 2004, from 45 last month. That improvement in sentiment helped push a measure gauging the country's current economic climate up to 94.7, the highest since October 2004, the report said.

There are other signals that growth is gaining momentum. Italian industrial production gained in February and business confidence rose to the highest in five years in March.

ECB council members have cited improving economic growth in the euro area as a reason for raising the benchmark interest rate twice since November, to 2.5 percent. Policy makers including President Jean-Claude Trichet and council member Klaus Liebscher have signaled the Frankfurt-based central bank may raise borrowing costs again in June, a possibility supported by futures trading.

The yield on three-month interest-rate future due in June was 2.96 percent at 9:17 a.m. in Rome. The contracts settle to the three-month euro inter-bank offered rate, which has averaged about 15 basis points more than the ECB rate since the euro's start in 1999. A basis point is 0.01 percentage point.

To contact the reporters on this story: Sheyam Ghieth in Rome at sghieth@bloomberg.net

Last Updated: April 20, 2006 08:55 EDT