Turkey's AKP faces challenges after poll victory

ISTANBUL, July 23 (Reuters) Turkish Prime Minister Tayyip Erdogan vowed to press on with reforms to turn his secular, Muslim country into a modern democracy on a par with its European neighbours after a fresh election victory.

His ruling pro-business AK Party (AKP) sharply increased its share of the vote in parliamentary elections yesterday despite opposition efforts to portray the Islamist-rooted party as a Trojan horse set to turn Turkey into an Iranian-style theocracy.

It was a personal triumph for Erdogan, a controversial but extremely popular politician, who called the election early after the secular establishment, including army generals, refused his choice of an ex-Islamist ally as next head of state.

With virtually all votes counted, unofficial results gave his party 46.6 per cent, up more than 12 points on 2002, but a more united opposition means it will get 340 out of 550 seats, slightly fewer than now.

''This is the first time in 52 years that a party in power has increased its votes for a second term,'' Erdogan told thousands of jubilant supporters outside his party's plush new headquarters in the capital Ankara where fireworks lit the sky.

''We will continue to work with determination to achieve our European Union goal.'' Market reaction showed investor enthusiasm for the result, with the lira rallying to 1.2570 against the dollar in early Istanbul trade, firming 1.4 percent from its New York close on Friday.

Markets had rallied ahead of the election on the belief that the AK Party would win enough votes to continue pro-business policies and economic reforms, but not enough to change the constitution and provoke the powerful army.

Two other, secularist, parties made it into parliament -- the nationalist Republican People's Party (CHP) with around 111 seats and the far-right National Movement Party (MHP) with 71.

The next government will quickly face new challenges ranging from economic reform to a possible military incursion to root out Turkish Kurd rebels based in north Iraq.

TREAD GINGERLY Erdogan must tread gingerly between supporters who hope his victory might mean an easing of religious restrictions in public life -- such as a ban on headscarves in public offices -- and army generals who see defending a secular system as their duty.

Relations with the military fell to fresh lows after the chief of general staff warned in April it would intervene in politics if the republic's secular values were at risk, the start of a crisis that triggered the early election.

Erdogan said the result boosted democracy in NATO-member Turkey, whose army removed a government it deemed too Islamist as recently as 1997.

The ruling AK Party must find a compromise candidate for president, and quickly have to decide whether to send the army into northern Iraq to crush Turkish Kurdish rebels based there.

Turkish security forces have been battling PKK rebels since 1984 in a conflict that has cost more than 30,000 lives. Violent clashes have increased over the past year.

Some 27 mainly Kurdish independents got into parliament, the first Kurds since the early 1990s -- prompting wild celebrating in their troubled eastern heartland.

Erdogan, 53, has presided over an economic boom, record foreign investment and winning EU membership talks status.

Economists said Erdogan could now press on with free-market policies and kick-start stalled EU talks, although disillusionment at joining the bloc and resistance from France could spell trouble ahead.

''The economic programme and structural reforms will continue in the same way,'' Finance Minister Kemal Unakitan told Reuters.

''Arguably it's the best-case scenario because we have a solid majority but not so strong, so it will be necessary to compromise,'' said Wolfango Picolli, a Turkey analyst.

REUTERS SKB ND1125