Italy leads European shares lower after weak debt sale

European shares turned lower on Friday, led by Italian stocks after a weak auction of the country's bonds highlighted increasing concerns about a political crisis in Rome. Milan's FTSE MIB fell 1%, the worst performer among European indexes, after Italy had to pay the highest yield since June to borrow over 10-years at an auction on Friday, reflecting worries the country's economic reforms may be derailed if the government collapses.

Former premier Silvio Berlusconi's centre-right party has been threatening to pull out of the government if he is expelled from parliament due to a conviction for tax fraud.

The broader STOXX Europe 600 index was down 0.4% at 311.94 points as the political stand-off in Italy added to tensions over difficult US budget and debt negotiations.

Stronger economic data has helped the index rise 9.5% in the past three months, sending it to a five-year high last week and leaving it trading at 1.7 times its book value, its highest valuation multiple since 2011, Datastream data showed.

"Prices were reflecting an idyllic scenario, so there's scope for a fairly substantial correction," a pan-European broker in Milan said. "Obviously, if Berlusconi turns and says he won't bring down the government the market is going to fly again."

The euro zone Euro STOXX 50 index was down 0.5% at 2,909.29 points while the Euro STOXX volatility index , a gauge of market bets on future swings in euro zone blue chips based on option prices, rose 1.2%.

The broader FTSEurofirst 300 index was down 0.5% at 1,251.97 points, but remained on course for its best quarterly gain since 2009.

The index has risen around 8.7% over the past three months, or 50% faster than the US S&P 500 index, Datastream data showed. US investors switched into European stocks and out of their domestic market in the seven days to Sept. 25 as the US budget talks and uncertainty over monetary and fiscal policy hampered Wall Street shares.

Nick Xanders, head of strategy at BTIG, recommended that investors bet on further outperformance of European stocks over their US counterparts in the coming months.

"With the situation going on in terms of the US debt ceiling there is no reason to change that trade," said Xanders. "You'd probably see another 3-4% (return on the trade until the end of the year) assuming Italy doesn't blow up."