THE Australian dollar fell one per cent and bonds eased in early trade this morning after an inconclusive election appeared to have delivered investors’ worst fears -- a minority government with power thrust on a handful of independent MPs.

With neither of the major parties winning an overall majority in Saturday’s election to form a government, vote counting is set to continue for several days and leaves the prospect of the first hung parliament in 70 years.

In early Pacific trade, the Aussie hit a low of $0.8833 from Friday’s close at $0.8940, before recovering slightly to trade at $0.8871.

Markets were looking vulnerable even without the election uncertainty because of weak stock markets overseas on Friday and continuing concerns about the economic recovery.

Australian stocks are also expected to lose ground, although moves may be limited to certain stocks including mining shares such as Rio Tinto and BHP Billiton on uncertainty over a planned mining tax and telecoms giant Telstra on government plans for a broadband network.

“I think the markets will be a bit soft but I don't think the election uncertainty will be a great pull on the market,’ said Michael Heffernan, senior client adviser and strategist at Austock Securities.

“"There have been plenty of countries around the world with close elections and we are a democracy ... and investors realise this,” Heffernan added.

Australian share index futures were down 9 points to 4,387 a 43.9 point discount to the close on Friday.