By John Geddie
LONDON (Reuters) - The single currency and European stocks slipped on Monday after the bloc's most powerful leader German Chancellor Angela Merkel won a fourth term but faced a fractured parliament as support for the far-right surged.
Investors were unnerved by the prospect of months of coalition talks which could distract from negotiations with Britain over its divorce from the European Union and efforts to integrate the bloc's remaining members.
Political uncertainty also weakened the New Zealand dollar as the ruling National Party won the largest number votes in a weekend election but failed to secure a ruling majority, with a protracted period of coalition building now a possibility.
"Merkel's most pressing task now is not to knit Europe closer together. It's to form a coalition which will prove to be extremely difficult and time-consuming," said Oliver Rakau, chief German economist at Oxford Economics.
The euro slid 0.3 percent to $1.1918 <EUR=D4>, putting more distance between a 2-1/2-year high of $1.2092 reached on Sept. 8, when a European Central Bank policy meeting left currency bulls optimistic the ECB would begin tapering its big stimulus programme.
Euro zone stock markets were down 0.3 percent (STOXXE), although falls were more pronounced in Asia where equity markets were hit by concerns over the economic health of the world's second biggest economy China.
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) was last down 0.8 percent.
Hong Kong's Hang Seng (HSI) was down 1.3 percent and Shanghai (SSEC) slipped 0.4 percent after a number of Chinese cities rolled out new measures to cool housing prices.
Investor sentiment was also undermined by concerns that China's beefed-up environmental protection could reduce demand, and consequently economic growth.
FEW OPTIONS
In European debt markets, the focus was firmly on the German election where the anti-immigration Alternative for Germany (AfD) stunned the establishment by becoming the first far-right party to enter parliament in more than half a century.
All parties have ruled out a coalition with the AfD and Merkel's only straightforward path to a majority in parliament is a three-way tie-up with the liberal Free Democrats (FDP) and the Greens - an arrangement untested at national level.
Investors bought German government bonds on the result - seen as one of the safest stores of cash in the euro zone - and sold lower-rated debt in the likes of Portugal, Spain and Italy. [GVD/EUR]
Overall the market moves were fairly modest, however, and some analysts said investors may have used the result as an excuse to sell the euro which was moving lower before the vote.
"The euro...was already losing support from the European Central Bank's monetary policy theme and appeared to be on its way lower," said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.
In New Zealand, the kiwi, the world 11th most-traded currency, was down 0.7 percent at $0.7288 <NZD=D4> and set for its biggest daily drop in around a month.
It was at a 1-1/2-month high of $0.7435 as recently as Sept. 20, when speculation for a comfortable ruling party win had boosted the currency.
"While there are a few different scenarios and some potentially testy issues to negotiate, ultimately the political landscape appears as though it will remain relatively centralist and we are reasonably agnostic on what it all means," wrote economists at ANZ.
The British pound edged up 0.3 percent to $1.3541, bouncing back from a slide on Friday when ratings agency Moody's downgraded its credit rating.
The dollar was up 0.2 percent against a basket of six major currencies at 92.397 (DXY).
The greenback added 0.3 percent at 112.27 yen <JPY=>, reversing losses suffered on Friday when the exchange of insults between U.S. President Donald Trump and North Korea heated up, sapping broader risk appetite.
Oil prices consolidated after surging on Friday, when OPEC and other oil producers said they were clearing a glut that has weighed on crude prices and may wait until January before deciding whether to extend their output curbs beyond the first quarter of 2018.
Brent crude futures (LCOc1) was down 0.2 percent at $56.73 a barrel, not far from a 6-1/2-month high of $56.91 set on Friday.
U.S. crude (CLc1) lost 0.5 percent to $50.52 a barrel.