Czech right to start govt talks after unclear vote

PRAGUE, June 5 (Reuters) Czech President Vaclav Klaus asked the right-wing opposition today to try to form a new government and lead the country out of a stalemate produced by the weekend's election.

Mirek Topolanek's Civic Democrats won the biggest share of the vote but not a majority in the ex-communist nation's first election since joining the European Union in 2004.

The Civic Democrats and their two smaller potential centrist allies, the Greens and Christian Democrats, will together hold 100 seats in the 200-member lower house -- the same as the ruling Social Democrats and the far-left Communists.

''I invited the chairman of the victorious party, Mirek Topolanek, here to authorise him to lead talks on the political scene on forming a new government,'' Klaus told reporters.

He added in a statement that he had called for the parliamentary term to begin on June 16, the first step toward replacing the government of Prime Minister Jiri Paroubek.

Any solution to the deadlock is likely to produce a weak government, unless the two main parties can forge a ''grand coalition'' -- an unlikely outcome given the acrimony between Topolanek and the incumbent prime minister.

The deadlock pushed the Czech crown, stocks and bonds lower and had a knock-on effect in neighbouring markets but analysts said the country's six per cent economic growth and strong exports would limit any fallout.

''While the outcome is a surprise, it is important to recall that the economy has not recently proved sensitive to political turmoil,'' said Oliver Weeks, economist at Morgan Stanley.

Topolanek, a former businessman who campaigned on a promise to introduce a low flat tax and implement fiscal reforms, said he would turn to his natural allies in the talks, and that he would update Klaus on his progress by the middle of next week.

''I have specific assurances from two political parties, the Green Party and the Christian Democrats, about (their willingness to start) talks on a new government,'' he said.

He said he would also talk to the Social Democrats, whose support he will need in some form to win a confidence vote.

TIGHT LEASH AT BEST Paroubek, whose party came second on a platform of higher social spending, has proposed his party go into opposition.

He has not excluded allowing a centre-right cabinet to survive the confidence vote, but he would keep any conservative cabinet on a tight leash, making bold reforms unlikely.

''A government programme must not include a flat tax, flat pension and other nonsense of this kind, such as the privatisation of public services, privatisation of (power firm) CEZ,'' the website for the daily Mlada Fronta Dnes quoted Paroubek as saying.

''I exclude anything like that in the programme, as well as healthcare reform according to the ODS,'' he said.

Paroubek's demands seemed in line with fears the result dashed hopes of an overhaul of taxes, pensions and health care, but on the other hand narrowed fears that deep tax cuts would bite into the budget and push euro adoption years beyond 2010.

Some analysts said Topolanek would try to win formal appointment by Klaus quickly even without secured parliamentary backing, in order to replace Paroubek as soon as possible.

If Topolanek forms a cabinet and loses the confidence motion, there will be two more attempts to form a government before the president can call an early election.

REUTERS SRS RAI2148