MILAN (Reuters) - Giorgia Meloni looks set to become Italy's first woman prime minister at the head of its most right-wing government since World War Two after leading a conservative alliance to triumph at Sunday's election.

Following is some of the initial reaction from market observers:

LUCA CAZZULANI, HEAD OF STRATEGY RESEARCH; LOREDANA MARIA FEDERICO, CHIEF ITALIAN ECONOMIST, UNICREDIT

"We expect a rather muted market reaction in terms of BTPs credit spread in the short term, as the election outcome was broadly in line with expectations. Some short covering is possible given investors entered the election moderately short BTPs and as the risk scenario of a landslide victory by the right is priced out. We continue to expect the 10-year BTP-Bund spread to trade close to 250 basis points until year end."

DOMENICO GHILOTTI, ANALYST, EQUITA

"From a market point of view, we expect the BTP-Bund spread to settle around 230-250 basis points as we wait for the market to assess the composition of the government and the budget law, unless there is a change of tone from the new government or a marked worsening of the macro environment.

"Higher inflation on both 2022 and 2023 leaves some room to keep the debt/GDP ratio under control (higher tax revenues offsetting higher borrowing costs and pension spending)."

GIADA GIANI, ECONOMIST, CITI

"A clear-cut victory for one coalition makes it more likely that the next government will last longer than recent ones. It also speeds up the appointment of the new government, probably before end-October."

"Meloni's first key decision will be the appointment of the finance minister, with a pro-Europe, fiscally-cautious personality looking a likely choice for now. We do not expect an immediate push for a major fiscal relaxation, but we do see risks over the medium term that the right's policy agenda will clash with EU objectives."

LORENZO CODOGNO, CHIEF ECONOMIST, LC-MA

"The role of Forza Italia may be crucial for the centre-right coalition and therefore provide some guarantee on international alliances and the stance towards Europe.

"The PD weakened substantially, while the Five Star Movement scored well relative to opinion polls. All in all, despite some minor but important shifts, no major surprise. The new coalition's first steps will be crucial to see whether the reassuring signals are confirmed. Yet, many questions remain unaddressed".

GIUSEPPE SERSALE, FUND MANAGER AND STRATEGIST, ANTHILIA CAPITAL PARTNERS

"There are no big surprises. I expect a relatively small impact considering that the League, the party with the least pro-European stance, seems to have come out weak."

"For the moment the market seems to be oriented more by macroeconomic issues. If we see a penalisation of Italian assets it could be due to the elections, but fundamentally ... Italy is a country with (worrying) public finances, regardless of who is in government."

"The market knew this was how it was going to end and will remain focused at this stage on economic growth, monetary policy tightening and public finances, which remain a slippery slope for Italy."