-Berlusconi leads Italy election polls
-EC president urges EU leaders to agree on budget
-Merkel rejects calls by French President over euro's exchange rate

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European equities tumbled Wednesday as fears of renewed financial instability in Italy were raised ahead of general elections.

Former Prime Minister Silvio Berlusconi is currently leading the polls in the February 24-25th elections after promising to cut taxes and end a levy on first homes implemented by Mario Monti's government.

Berlusconi narrowed the gap to front-runner Pier Luigi Bersani to 3.7 percentage points, a poll by Tecne institute for SkyTG24 showed.

News that the former leader, who has been previously accused of leaving behind a mess during his previous reign, might regain his position raised concerns and rattled markets.

Italian government bonds fell today with the yield on 10-year notes rising one basis point to 4.47%.

Investors are also eyeing signs of a possible division between France and southern Europe as well as Germany and the UK ahead of tomorrow's European Council.

"This negative signal, together with recent fears of political instability in Spain and in Italy, suggest that Europe is not yet out of the crisis, even though the ECB's threat of triggering the OMT should prevent a massive sell-off like in the first half of 2012," Barclays Research said.

European leaders are expected to try to find an agreement on the European Budget for 2014-2020.

European Commission President José Manuel Barroso urged leaders to reach a deal on the budget at tomorrow's summit.

"The Commission hopes that the heads of state and government will be able to come to a political agreement that can be the basis for the Council to obtain the consent of the European Parliament," he said.

"And today I appeal to all the heads of state and government to bridge their differences and come to Brussels in a spirit of compromise and European responsibility so that this political agreement can be found," he said in a speech on preparation for the meeting of the European Council.

Merkel slams euro exchange rate proposal

German Chancellor Angela Merkel's turned down calls by French President Francois Hollande to manage the euro's exchange rate. She said currencies should be determined by the market rather than managed.

Deutsche Bank suspended five traders in Frankfurt amid an investigation into attempts to rig interbank lending rates, sources told Bloomberg.

The worst performers in the sector today were Chemicals (-1.24%), Insurance (-0.81%) and Telecommunications (-0.78%).

Hargreaves Landown gains on profits

Hargreaves Lansdown soared 10.96% after the stockbroker reported a pre-tax profit of £93.7m, beating market forecasts.

Vinci fell 3.22% after the construction company reported a decline in 2012 profits.

ArcelorMittal jumped 1.45% as the steelmaker surpassed analysts' estimates with a $1.32bn drop from $1.71bn in earnings before interest, taxes, depreciation and amortisation for the fourth quarter.

Elisa Oyj fell 5.2% after the Finnish wireless carrier posted fourth quarter sales of €396m, falling below the estimated €405.6m.

Euro/dollar plunges

The euro/dollar dropped by 0.40% to 1.3529.

Front month Brent crude futures were up by 0.103 dollars to the 116.640 dollar level on the ICE.

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