ZAGREB, Nov 26 (Reuters) Croatia's ruling conservative HDZ party looked on course today to win another four years in power and take the nation into the European Union after a close-fought parliamentary election.
However, the HDZ did not secure an outright majority, forcing it to start looking for coalition partners.
Preliminary election results, based on almost 100 percent of all votes, gave Prime Minister Ivo Sanader's Croatian Democratic Union (HDZ) 61 seats. The Social Democrats (SDP) had 56 seats.
The HDZ can expect five more seats from expatriates, mainly Croats living in Bosnia, thanks to its extensive campaigning in the neighbouring country, where the SDP chose not to run.
Sanader, who all but proclaimed a victory lastnight, still needs to swing a smaller centrist coalition and some of the ethnic minorities to win the 153-seat parliament.
SDP leader Zoran Milanovic vowed to do the same and said he was starting coalition talks ''immediately''.
A source close to the SDP told Reuters today the party was not giving up and already had 68 hands secured. ''Our chances are still quite realistic,'' the source said.
MORE REFORMS, EU MEMBERSHIP Both HDZ and SDP pledge more reforms and European Union membership by the end of the new government's four-year mandate.
Standard&Poor's global rating agency kept Croatia's sovereign credit ratings unchanged after the election, saying the outlook was stable and both main parties had ''a strong commitment to EU membership''.
The national kuna currency and the main stock market index gained some ground today, while spreads on Croatia's Eurobonds widened 2-4 basis points, which analysts said was ''the usual reaction after an election''.
''If the HDZ forms the government, investor attitude will not change as they already know the HDZ's economic policy,'' said Marko Dicak of Hypo-Alpe-Adria Bank.
With Sanader at the helm, Croatia opened EU membership talks in 2005 and has enjoyed steady economic growth. But critics say living standards barely improved and corruption remains rife.
''If it is SDP, investors may be more cautious while they see what it stands for,'' Dicak added.
Croatia's widely circulated Jutarnji List newspaper said in a commentary the HDZ deserved the mandate.
''It is a basic rule of democracy. If you lose the election, you are not entitled to form the government. If the SDP had two or three seats more than the HDZ, no one serious would deny them the right to try to form the cabinet,'' the daily said.
In Croatia's complex electoral system, the party with the most votes is not automatically guaranteed four years in power.
''Now it is all up to how well the main parties communicate with potential partners,'' said political analyst Andjelko Milardovic. ''But the HDZ does have a starting advantage''.
Regardless of the outcome, the country's political and economic agenda will in practice be dictated by Brussels.
Croatia must reform its inefficient judiciary and bloated public administration, crack down on corruption and cut subsidies to indebted state firms to be allowed to join.
For a table with preliminary election results click on [ID:nL26643164] REUTERS PD VC1940