European stocks opened lower on Tuesday and the euro hit an eight-day low against sterling as a governing crisis in Germany weighed on markets.

The pan-European Stoxx 600 index opened down 0.3 per cent, hitting the MSCI World index that pared overnight gains to trade flat on Tuesday.

Fresh elections

On Monday evening, German chancellor Angela Merkel had said she would prefer fresh elections to ruling with a minority government after talks on forming a three-way coalition collapsed.

German President Frank-Walter Steinmeier said Germany was facing its worst governing crisis in the 68-year history of its post-World War Two democracy and pressed all parties in Parliament “to serve our country” and try to form a government.

“The events have already been likened to Germany's Brexit-moment,” said Daniel van Schoot, an economist at Rabobank. “That is perhaps exaggerated, but the German political situation is now very unpredictable, more than in the past three decades.”

Uncertainty in Germany kept a lid on the euro. It was broadly flat after falling 0.52 percent on Monday - its worst day since late-October.

The common currency hit an eight-day low against sterling, before recovered some losses to trade down 0.03 per cent.

Lira hits all-time low

In emerging markets, focus remained squarely on the Turkish lira which hit an all-time low of 3.9780 against the dollar, as recent pressure on the central bank from the government and tensions with the United States over a gold trader accused of violating its sanctions on Iran accelerated the losses to some 17 per cent since September.

As the currency slid, the central bank announced measures to shore up the lira and an official from the bank said the weighted average cost of funding would be 12.25 per cent on Wednesday, up from 11.99 percent on Monday.

The currency's slide since September has been accompanied by a jump of nearly 200 basis points in short-term government debt yields in the same period, a relatively buoyant time for other emerging markets and global equities.

“There is pressure on the lira from rising NATO tension, criticism of the central bank from the president and government and uncertainty regarding the US court case,” said Reel Kapital Securities deputy research manager Enver Erkan.

Dollar close to 1-week high

On a broader basis the dollar gave back some of its gains in Asian trading on Tuesday but stuck close to a one-week high against a basket of currencies as the German political deadlock continued to pressure the euro.

The dollar index, which tracks the greenback against a basket of six major rival currencies, was broadly flat at 94.07 , but was still within sight of its overnight peak of 94.104, its highest since November 14.

Meanwhile, poor corporate earnings in Europe were also in focus: British power provider Aggreko and manufacturer Melrose were both down by as much as 10 per cent after worries over profits.

In government bonds, the gap between French and German borrowing costs on Tuesday narrowed to its tightest level since before the euro zone debt crisis of 2010-2012.

Oil prices rose on expectations of an extended OPEC-led production cut, although rising output in the United States capped gains. Brent crude futures were up 0.78 per cent to $62.72.

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