Portugal stocks extend fall after PM Costa resigns, bond spread touch wider

EU leaders meet in Granada

MILAN (Reuters) - Portugal's stocks extended losses on Tuesday and its bonds underperformed after Prime Minister Antonio Costa quit over an investigation into alleged irregularities in handling lithium mining and hydrogen projects in the country.

The country's top PSI 20 equity index fell more than 3% at one point after opening down 0.6%. The broader European equity market was broadly unchanged.

Portuguese government bonds pared some of their price gains for the day and underperformed their peers.

The 10-year bond yield was down 2.3 basis points at 3.40%, while 10-year bond yields in Italy and Spain were 9 and 6 bps lower respectively. Yields move inversely to prices.

The closely-watched gap between 10-year government bond yields in Portugal and euro zone benchmark bond issuer Germany widened to 69 bps, from 65 bps at Monday's close.

"Portugal's been quite market friendly from a political perspective... This might not change things, but there is a bit of a sell-off in Portuguese bonds given that the PM’s just resigned very suddenly over a corruption scandal investigation,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

Shares in Galp Energia led stock fallers in Lisbon, down more than 5%.

(Reporting by Danilo Masoni, Joice Alves and Harry Robertson; Editing by Dhara Ranasinghe)