Greek voters over the weekend punished mainstream politicians who had backed cost-cutting plans demanded by the country's international lenders, leaving the country without clear leadership. In France President Nicolas Sarkozy was thrown out in favor of Socialist Francois Hollande, who pledged "to finish with austerity."
Investors on Monday worried that the shifting political landscape in Europe could undermine the region's long battle to keep its shared currency intact and restore the faith of global investors. European markets slumped early on, but closed higher after worries about the political changes dissipated and investors focused on Hollande's pledges to encourage economic growth.
Investors were also relieved after Spain announced a plan to present measures this week to support the country's ailing banks. Prime Minister Mariano Rajoy said he would not rule out lending or injecting public money into the country's financial system.
Stocks rose sharply in Spain, ending up 2.7 percent. France's main index gained 1.7 percent. The euro also recovered ground it lost against the dollar.
In the U.S., the Dow Jones industrial average fell as much as 68 points in early trading, but recouped its losses and even gained 10 points by the afternoon. The Dow finished the day down 29.74 points, or 0.2 percent, at 13,008.53.
The election results in Europe showed that voters were rejecting the extreme belt-tightening required by international bailouts and favored by Germany's leadership.
Investors are waiting hear the newly-elected leaders articulate their visions for how to deal with the euro zone's debt crisis, which is why there is a muted reaction from stock markets, according Kim Caughey-Forrest, equity research analyst at investment firm Fox Pitt Capital Group.
"There is no reason to cry until you get hurt," said Caughey-Forrest.
The verdict from European voters will likely force leaders there to go back to the table and come up with more acceptable solutions to the debt crisis that has plagued many nations. The deep cuts in government spending have already worsened the situation in many countries, leading them into deeper economic distress and increasing already high unemployment.
Many believe the austerity programs are necessary to keep bond investors from panicking about the possibility that more European nations will default or require bailouts.
However, a growing number of politicians, like France's Hollande, say the cuts have been too much, too fast. They say the region's economy can't return to growth unless governments stop tightening the fiscal noose and start spending again to create demand. Some economists also now believe that the cuts have to be accompanied by some government economic stimulus to promote growth.
"We are going to hear a more balanced prescription coming out of the European leadership," said Quincy Krosby, a market strategist at insurer Prudential Financial. "The elections were a strong message for pro-austerity leaders from the people."
Initially, traders also bought up ultra-safe Treasurys overnight when stock markets in Europe were falling. That pushed the yield on the 10-year note as low as 1.83 percent early Monday morning, a level it hadn't reached since early February. However, the yield rebounded to 1.88 percent in late trading, the same level it was at late Friday.
Earlier in Asia, Japan's Nikkei index plunged 2.8 percent to its lowest finish in three months. In addition to Europe's elections, it was also the first time for investors in Asia to react to a weak jobs report Friday in the U.S. Hong Kong's benchmark Hang Seng index slid 2.6 percent.
Among U.S. stocks that made big moves:
— Disney rose 2 percent after its movie "The Avengers" pulled in $80.5 million in its domestic debut Friday, the second-best haul ever on opening day. The movie was made by Disney's Marvel Studios unit and is based on Marvel Comics heroes.
— Cognizant Technology Solutions plunged 19 percent after the information technology services provider lowered its forecast for the full year on low demand, echoing the bleak outlook from other rivals due to uncertainty in the global economy.
— Meat products maker Tyson Foods rose over 3 percent after reporting an increase in its second-quarter profit on higher beef and chicken prices.
— Frontier Communications fell 7 percent after the regional telecommunications provider said it was losing residential and business customers. The company had bought rural landlines from Verizon Communications two years ago, which led to several quarters of growth last year.