After an initial fall at the open, the pan-European STOXX 600 index switched back into positive territory and gained further strength as Wall Street reversed earlier losses. The STOXX closed up 1 percent at 370.87 points.

Italy's FTSE MIB blue-chip index fell 0.4 percent to November lows, dragged down notably by weakness among its banks. Italy faces a prolonged period of political instability after voters delivered a hung parliament.

"We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets," said Matteo Ramenghi, CIO at UBS WM Italy.

Italy's parliament will meet for the first time on March 23 and President Sergio Mattarella is not expected to open formal talks on forming a government until early April.

Italian banks, seen as a proxy for political risk given their large government bond holdings, were down 2.6 percent to a near two-month low

Mid-sized Italian banks with domestically focused operations and high bad loan burdens were worst hit. BPER Banca lost 7.6 percent, Banco BPM 6.1 percent and UBI Banca UBI.MI 3.7 percent.

European financials were also dragged down by France's AXA, which fell 9.7 percent. Europe's second-biggest insurer was the worst performer among blue chips, after it agreed to buy property and casualty insurance company XL Group for around $15 billion.

Mediaset fell 5.5 percent after the party of former Italian Prime Minister Silvio Berlusconi, whose family controls the private broadcaster, did worse than expected.

JCI Capital fund manager Alessandro Balsotti said even though the result of Italy's vote was not market-friendly, he did not expect systemic repercussions for European integration or the single currency, given that even the anti-establishment parties had toned down eurosceptic rhetoric during the campaign.

The situation in Italy was in strong contrast to Germany where Social Democrats voted to re-enter a grand coalition with Chancellor Merkel’s conservatives, signalling an end to political uncertainty in Europe's biggest economy.

Germay's DAX index added 1.5 percent, a rise seen as a sign of confidence in Europe's economic recovery which helped confine worries about the Italian political situation.

"The economic recovery in Europe and worldwide is much more resilient than in the past and the balance sheets of the companies are much stronger after many years of restructuring programmes," French asset manager Amundi said in a note.

U.S. President Donald Trump on Saturday threatened European automakers with a tax on imports if the European Union retaliated against his plan to slap tariffs on aluminium and steel. German automakers BMW and Daimler were down 0.6 and 0.1 percent respectively.

(Additional reporting by Julien Ponthus; editing by Mark Heinrich)

By Danilo Masoni