Spanish shares tumbled on Monday, with markets spooked by the prospect of political gridlock following a snap election in which the right failed to clinch a predicted victory.

Sunday's vote left neither the right nor left bloc with an easy path to form a government, though the centre-right People's Party (PP) will be given the first stab at trying to cobble together enough votes in parliament.

The country's fiscal policy, banks and green energy transition are in focus, and protracted political deadlock could dent Spanish stocks, which are up over 15% this year.

A Catalan independence leader on the run from Spanish justice could hold the key to unlocking the impasse, but that could also bring the Catalan independence debate back into the spotlight.

Here are five key questions for investors.

1/ HOW HAVE MARKETS REACTED?

Not happily. Spain's Ibex index dropped as much as 1.8%, with a banking sub index at one point down nearly 3%.

The reaction in Spanish government bonds was muted, with the closely-watched gap between Spanish and German 10-year yields around 104.60 basis points.

AlphaValue analyst Pablo Garcia said further share declines could follow as markets were still hoping for negotiations to lead to an agreement on a government.

"Possibly the worst is yet to come. Foreign investors are the majority in the Spanish market and if no one among the main candidates accepts defeat, that is very serious."

2/ WHAT DOES UNCERTAINTY MEAN FOR SPAIN'S ECONOMY?

The prospect of weeks of political wrangling casts a shadow over an economy slowing from a post-pandemic rebound. Data on Monday showed a downturn in euro zone business activity deepened in July.

"It could delay or hamper the implementation of much-needed economic reforms and thus inhibit the long-term growth potential of the Spanish economy," said ING economist Wouter Thierie.

Spain had shown resilience to bouts of short-term uncertainties in the past, though, he added. The government forecasts economic growth of 2.1% in 2023 versus 5.5% last year. Spain's high debt levels are also in focus, with debt above 100% of GDP and a deficit of 4.8% of GDP.

3/ WHY DID UTILITY STOCKS FALL?

With Spain getting drier and hotter, energy was a major election topic.

The PP proposes extending the life of nuclear plants beyond their 2027-2035 closure window, which RBC analysts said "would have been a clear positive" for utilities' earnings.

Now, "the potential short-term uplift in earnings will need to be removed", they said on Monday.

"In addition, the increase in uncertainly will result in a higher cost of capital at least until it is clarified what form the new government will take."

That hit utilities majors. Endesa shares fell 3%.

4/ WHAT ABOUT THE BANKS?

Shares in major lenders Santander, BBVA, Sabadell and Caixabank fell 1-3%.

Investors had been watching the election to see if there would be an extension of a two-year, 4.8% levy approved in December on banks' net interest income and net commissions above 800 million euros ($880 million).

Barclays said ahead of the vote that an inconclusive outcome might be not ideal for the banks, "given that prolonged uncertainty would leave the tax question unanswered, and in general would not be supportive for growth."

5/ ARE THERE IMPLICATIONS FOR THE EUROPEAN UNION?

Yes, because Spain just took over the six-month rotating EU Council presidency and legislation such as new fiscal rules needs approving.

Federico Santi, senior analyst, Europe, at Eurasia Group, said the election results could be a mild positive for the EU.

"The top leadership will he hugely distracted with government formation and a possible new election campaign. But this will make for a degree of continuity, and give diplomats the space to continue their work," he said.

Spain wants to conclude a long-delayed trade deal with South America's Mercosur bloc and an EU-wide migration deal. It is also pushing for a common corporate tax rate and for progress with the EU's banking union.

($1 = 0.9072 euros)

(Reporting by Sam Indyk, Alun John and Dhara Ranasinghe in London, Jesus Aguado in Madrid and Matteo Allievi in Gdansk; Compiled by Alun John; Graphics by Kripa Jayaram, Pasit Kongkunakornkul, Sumanta Sen and Vineet Sachdev; Editing by Mark Potter)