By Carla Mozee and William L. Watts, MarketWatch

LOS ANGELES (MarketWatch) -- The euro slipped Monday as exit polling from Italy's bitterly contested general election began to roll in, with markets considering the possibility of a win by former prime minister Silvio Berlusconi.

The euro (EURUSD) recently traded at $1.3175, down from $1.3182 late Friday as some media reports said Berlusconi's center-right alliance was leading in the race for the Senate. Earlier, media reports said exit polls indicated a center- left coalition led by Democratic Party leader Pier Luigi Bersani was on track to win Italy's election.

The euro had traded as high as $1.3319 on Monday.

A victory for Berlusconi's coalition had been regarded by some as a threat to Italy's deficit-reduction measures that are aimed at stabilizing the country's finances, and are seen as aiding in the improvement of financial conditions in the troubled euro zone.

Final Italian election results are likely to become available on Tuesday. .

A best-case scenario for the market would see a center-left coalition that includes technocratic Prime Minister Mario Monti, analysts said, while an inconclusive result or a strong showing by former premier Silvio Berlusconi could unsettle markets.

Italian stocks were volatile in the wake of the exit polls but managed to finish up 0.7% at 16,351.99. U.S. blue-chip stocks as measured by the Dow Jones Industrial Average (DJI) turned lower, trading down 44 points at 13,955. Among exchange-traded funds, the iShares MSCI Italy Capped Index Fund (EWI) fell nearly 3%.

The ICE dollar index (DXY) -- a measure of the greenback against six other major currencies -- was at 81.595, up from 81.454 in North America on Friday.

The WSJ dollar index , which captures the currency's moves versus a slightly wider basket of rival units, reversed course and was up at 72.65 from Friday's close of 72.55.

Meanwhile, the Japanese yen cut into earlier losses that had followed news reports that a longtime Bank of Japan critic and pro-stimulus advocate is in line to head the central bank.

The euro (EURJPY) traded at Yen123.06, pulling back from a session high of Yen125.34. It was at Yen123.12 on Friday.

The dollar (USDJPY) changed hands at Yen93.39 recently, and had been as high as Yen94.76 earlier Monday. The dollar late Friday was at Yen93.43.

Yen falls

The yen had fallen sharply after weekend reports in Japanese media that Haruhiko Kuroda likely has enough support to be appointed the next governor of the Bank of Japan, when incumbent Masaaki Shirakawa steps down on March 19.

Kuroda, currently president of the Asian Development Bank, has previously been quoted as saying that the Japanese central bank's monetary easing has been too timid in the face of deflationary pressures.

Reports of his nomination came against the backdrop of Japanese Prime Minister Shinzo Abe's efforts to push the central bank to help boost growth, and to adopt more aggressive policies to pull the country from an era of falling prices.

"Compared with other [Bank of Japan] governor candidates,...Mr. Kuroda is clearly more dovish than Mr. Muto. The announcement can be regarded as less positive for [the dollar's rate against the yen] than the nomination of Kazumasa Iwata," Nomura strategists led by Yujiro Goto wrote in a note.

Iwata, a critic of Bank of Japan policy, is expected to be named a deputy governor of the central bank, according to Crédit Agricole.

"All told, the Kuroda nomination will be a slight positive for [the dollar against the yen], in our view, perhaps worth a move of around 1% from Friday's close," the Nomura analysts said.

They added, however, that the situation could change, as there was still no official announcement from the government.

Pound extends losses

The British pound (GBPUSD), which had tumbled late Friday after Moody's Investors Service cut the U.K.'s sovereign ratings to Aa1 from Aaa, extended its slide on Monday. The pound fetched $1.5132, down from $1.5245 Friday before Moody's ratings action.

BK Asset Management managing director Kathy Lien said the downgrade adds to the growing number of reasons for the sterling to stay under pressure. She said the psychologically significant level of $1.50 could serve as near-term support, while the March 2010 and May 2009 lows around $1.4755 appear to be a "more important level."

"However, traders should also be mindful of the fact that the [British pound] is a very volatile currency pair that can experience large intraday swings," Lien said.

Among other major currency pairs, the Australian dollar (AUDUSD) was at $1.0286, down from $1.0327 late Friday.

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