By Yoruk Bahceli and Dhara Ranasinghe

LONDON, Feb 23 (Reuters) - The euro opened higher on

Monday while stock futures were volatile as Germany's

conservatives won the national election as expected, with

investors awaiting further results to see whether much-needed

fiscal reform was likely.

The conservative CDU/CSU bloc won 28.5% of the vote,

followed by the AfD with 20.5%, said a projection published late

on Sunday by ZDF broadcaster.

The euro traded as high as $1.05 and was last trading up

0.3% from late Friday levels at $1.0491.

EUROSTOXX 50 futures meanwhile swung between losses

and gains early in the session to last trade 0.07% higher, while

DAX futures rose 0.24%, after having fallen 0.1% shortly

after the open.

Bund futures were little changed.

Analysts said the focus now was on how quickly the

conservative Christian Democrats could form a coalition

government to bring about much-needed change to a frail economy.

"The most market-friendly coalitions are still possible in

theory, including the Grand Coalition and the Kenya one with the

conservative CDU, SPD (Social Democrats) and the Greens," said

Frederik Ducrozet, head of macroeconomic research at Pictet

Wealth Management.

The AfD, which opposes fiscal reform, did not do better than

expected, analysts said, supporting the outlook.

The big question for markets is whether Germany reforms its

"debt brake" that limits its structural budget deficit to just

0.35% of output.

The once-powerhouse economy, Europe's largest, contracted

for a second straight year in 2024. Critics blame the debt brake

for years of underinvestment.

Investors so far only see limited scope for reform, but

expectations for increased spending have grown in recent days as

raising defence expenditure gains urgency among European

capitals.

The election outcome is also key to how markets assess how

Europe will find potentially hundreds of billions of euros to

ramp up its defences.

The additional yield Germany pays for longer-term debt

relative to shorter is near its highest since 2022 earlier in

February.

Debt brake reform would also support euro area stocks and

the single currency, which dropped to around $1.01 earlier in

February on U.S. tariffs risks, analysts say.

Europe's benchmark STOXX 600 index has touched record highs

in recent days yet trade at sharp discounts to their U.S. peers

.

Positive sentiment could also prompt Germany's

domestically-focused midcap stock index to outperform

the export-focused blue-chip DAX index that has remained

insulated from domestic pressures, analysts say.

In addition to the far-right AfD, it remained unclear

whether the neoliberal Free Democrats, also opposing debt brake

reform, would gain enough seats, as exit polls put them around

the 5% threshold to enter parliament.

"Whether the largest parties will have enough votes to alter

the debt brake remains to be seen and is one of the interesting

questions that we do not yet have definite answers to," said

Nordea chief market strategist Jan von Gerich.

The number of smaller parties that enter parliament will

also determine whether a two-way coalition can be formed between

the Conservatives and the Social Democrats, or whether a third

party, the Greens or possibly the FDP, will be needed, which

could protract coalition talks and raise uncertainty in markets.

(Editing by Deepa Babington)