The winning coalition is automatically awarded 55% of the seats under a new electoral law. Mr Berlusconi's coalition held a one-seat lead in the 315-seat upper house, according to exit polls, but results for six seats elected by Italians abroad were still being counted.

Since both chambers have equal powers, a split control of parliament could deadlock legislation and force the country back to the polls.

"We have won, and now we have to start working to implement our program and unify the country," Mr Prodi said at a rally in Rome. "I am grateful to all of you because it has been a very difficult battle. Until the very end we were left in suspense, but in the end victory has arrived."

But the claim was immediately contested by Mr Berlusconi's camp. Paolo Bonaiuti, a spokesman for the sitting prime minister, told reporters that the centre-right coalition would call for a "scrupulous" check of election ballots. He called for a vote recount in the lower house, noting that the difference in the Chamber amounted to less than 25,000 votes.

"Such a narrow difference demands that there be a careful verification of the vote count," he said.

Later, some of Mr Prodi's supporters, waving flags, moved to Mr Berlusconi's nearby residence and shouted slogans under the premier's windows.

The election has been balanced on a knife-edge with exit polls showing at times both Mr Berlusconi and Mr Prodi heading for victory. The Senate and lower chamber of parliament have equal powers and any coalition would have to control both to form a government. Some centre-left and centre-right leaders have said that if neither side controls both houses, new elections should be called.

Even if one coalition controls both chambers, it would find it extremely difficult to pass legislation with such a slim majority, returning Italy to instability after Mr Berlusconi's five years in power.

If parliament is split between the two coalitions, the president could try to name a government of technocrats until another election can be held. He could also seek to fashion a coalition of left and right, but given bitter divisions among Italy's political parties, that seems unlikely.

Some politicians said that a possible solution to a legislative deadlock might be a "grand-coalition" government to handle urgent economic matters and the election of a new president - whose mandate expires in mid-May - with new parliamentary elections later in the year.

"We have to immediately send a message to the markets, to whomever wants to invest in Italy, that the country is not going to fall apart," said the culture minister, Rocco Buttiglione.

Mr Berlusconi, a 69-year-old media mogul who is Italy's longest serving premier since the second world war, was aiming for his third premiership with an often-squabbling coalition of his Forza Italia party, the former neo-fascist National Alliance, pro-Vatican forces and the anti-immigrant Northern League.

The 66-year-old Mr Prodi, a former premier and EU chief, was making his comeback bid with a potentially unwieldy coalition of moderate Christian Democrats, Greens, liberals, communists and former communists.

Italian voters were mainly preoccupied with finances. Mr Berlusconi, a billionaire businessman whose empire includes TV networks, insurance and real estate, failed to jumpstart a flat economy during his tenure, but promised to abolish a homeowner's property tax. Mr Prodi said he would revive an inheritance tax abolished by Mr Berlusconi, but only for the richest; he also promised to cut payroll taxes to try to spur hiring.

Italy faced chaos and confusion as early projections showed neither Silvio Berlusconi's centre-right alliance nor Romano Prodi's centre-left coalition had secured a clear victory.

The two blocs were neck and neck in both the Lower and Upper Houses, but Signor Berlusconi's bloc was gaining ground late last night. An Italian prime minister needs to win both to govern effectively. A split result could mean fresh elections.

Early exit polls proved to be wrong in predicting a clear victory for Signor Prodi, the former European Commission President, as Signor Berlusconi, whose five years in power have been dogged by economic stagnation and allegations of corruption, steadily gained ground during the count.

In both camps jubilation jostled with dismay. It was conceivable that the new government could be determined by the 12 MPs and six senators elected by a million Italians living overseas.

In France, M Chirac ordered Dominique de Villepin, his handpicked Prime Minister, to beat a humiliating retreat on his youth employment legislation after three months of strikes and huge street protests.

The upheavals in two of the European Union's four biggest countries will have repercussions far beyond their borders.

Signor Berlusconi has been pro-American, Eurosceptic, and an ally of President Bush and Tony Blair on Iraq and other issues. Under Signor Prodi Italy would favour Brussels over Washington and accelerate the withdrawal of Italian troops from Iraq. A sustained period of political paralysis would further postpone efforts to revive Italy's sick economy.

Most analysts agreed that M Chirac's capitulation marked the end of any serious attempts to reform France's restrictive labour laws before the presidential election in 2007.

It renders him a lame duck for the rest of his second term and seriously damages M de Villepin's chances of succeeding him, leaving the Prime Minister's old rival Nicolas Sarkozy the clear favourite to be the Centre Right's presidential candidate. However, the real victors were the socialists whose hopes of winning back the Elysée Palace have soared.

M de Villepin had gambled his political future on ramming through legislation designed to cut youth unemployment by allowing workers under 26 to be sacked without reason during a two-year trial period. Looking weary, he appeared on television to announce the scrapping of his First Employment Contract (CPE) in the face of massive protests by students, trade unions and the Left. "The necessary conditions of confidence and calm are not there," he said.

"I wanted to propose a strong solution to break with unemployment in our country. That was not understood by everyone. I regret it."

The Government said the CPE would be replaced by a more orthodox French measure to provide subsidies of 300 million euros (£200 million) a year to companies taking on young people.

Since the student riots of 1968, French governments have repeatedly capitulated in the face of sustained street protests. As recently as last week M de Villepin had insisted that his Government would stand firm, but his approval rating has slumped to just 25 per cent and after yesterday's U-turn the prospect of him resigning was being openly discussed.

M Chirac's standing is equally dismal. He has been unable to impose order on a troubled country, or even on a government split by internal conflicts. Twice before in his long career he has been defeated by street protests, and he had been reluctant to take on France's powerful student and workers' unions again. But he was convinced by M de Villepin, who said the 'easy hire, easy fire' contract was a tool in the fight against a youth employment rate of almost 23 per cent.

In the event opponents depicted the CPE as a symbol of Anglo-Saxon "ultra-liberalism" which threatened the very essence of French identity.

The ministers debated if the EU should get tougher with Iran over its nuclear plan, which the West fears is geared toward building nuclear weapons.

Solana ruled out, however, that EU would back any military action.

"Any military action is definitely out of the question for us," he said.

Solana said that the EU would await Iran's response to a
U.N. Security Council call for a halt to uranium enrichment before considering any actions. Iran has so far rejected international demands for clarity over its nuclear intentions.

"Iran has to respond to the Security Council. We have to be prepared in case they fail," Solana said.

"Poland has not yet made any commitment. We are listening and analysing what the Americans are telling us."

The Gazeta Wyborcza newspaper reported in November that Poland had held talks with the United States about stationing part of its anti-missile defence system on Polish soil.

The same month, a senior US defence official said Washington was discussing with Poland and other countries possible sites in Europe for a missile interceptor base capable of guarding against long-range missile attack.

Such a site in central Europe would provide both the United States and Europe protection against long-range missiles fired from the Middle East or North Africa, the official said.

The trial is expected to go ahead early next year and to last 12 months.

So far, more than 100 people have been arrested in the course of the investigations into the attacks, which have been blamed on Islamic radicals.

Rush hour

Judge Juan del Olmo has accused five Moroccan men - Jamal Zougam, Abdelmajid Bouchar, Youssef Belhadj, Rabei Ousman Sayed Ahmed and Hassan el Haski - of 191 murders and 1,755 attempted murders.

Jose Emilio Suarez Trashorras, a Spaniard suspected of providing the bombers with explosives, was charged with 192 murders - including the death of a policeman killed during a raid on suspected bombers after the attacks.

Spanish suspect Jose Emilio Suarez Trashorras
Jose Emilio Suarez Trashorras is accused of 192 murders

The others have been charged as accomplices over the 10 co-ordinated explosions on four trains during the busy morning rush hour.

Although the attack was claimed by al-Qaeda, the investigation has suggested the bombings were carried out by a local cell that was inspired by it, rather than directly ordered by the group's senior leadership.

Videotapes and internet postings by al-Qaeda leaders had urged Islamic radicals to target Spain and other countries with troops in Iraq and Afghanistan.

The attacks led to the fall of the then pro-US government in Spain, which had initially blamed the bombings on the Basque separatist group, Eta.

The complexity of the case and the large number of accused mean the trial is unlikely to get under way before next year.