Greek conservatives to govern with reduced majority

ATHENS, Sep 17 (Reuters) Greek conservative Prime Minister Costas Karamanlis today vowed to press ahead with economic reforms after being asked to form a government following his narrow election victory.

Faced with the tough job of making changes needed to bring the economy into line with other euro zone countries, he could find his room for manoeuvre limited after deadly forest fires and scandals eroded his majority.

''The President gave me the mandate to form a government,'' Karamanlis told reporters after meeting President Karolos Papoulias.

''We owe it to all Greeks, whatever they voted, to move ahead quickly, with determination and take the country forward.'' The conservatives won 152 seats in the 300-seat parliament, down from 165 seats in 2004 when they swept to power ending 11 years of socialist rule.

Karamanlis vowed to push on with reforms such as shoring up an ailing pension system and planned privatisations.

''Their life will be difficult now,'' Theodore Kouloumbis, vice president of the Hellenic Foundation for European and Foreign Policy, told Reuters.

''In order to push through major reforms in education and the pension system, for example, he (Karamanlis) will need at least the tolerance and even the cooperation of the Socialists.'' The opposition socialist PASOK party had its worst result since 1977.

The far-right LA OS party won 3.8 per cent of the vote, gaining 10 seats, the first far-right party to make it to parliament since seven years of military rule ended in 1974.

CHALLENGES AHEAD The government must overhaul a pension system expected to go bust in 15 years due to an ageing population, and push through a series of privatisations and unpopular education reforms.

Karamanlis pledged to continue reforms as thousands of supporters celebrated in central Athens, waving flags, blaring horns and setting off flares.

Finance Minister George Alogoskoufis, whose economic record is credited with securing the election victory, and Foreign Minister Dora Bakoyanni are expected to keep their posts.

''Alogoskoufis has been successful driving down the deficit and enjoys both the trust of the prime minister and of Europe,'' Kouloumbis said.

Bakoyanni's strong party support also ruled out any move, unless she requested it herself, he added.

Karamanlis called the election six months early, convinced his record of a reduced budget deficit, economic growth and a cut in unemployment would be enough to win.

But last month's forest fires that killed 65 people, together with scandals such as the sale of overpriced state bonds to pension funds turned a large number of voters away.

With almost all votes counted, Karamanlis had 41.8 per cent of the votes, down from 45.4 in 2004.

His education minister Marietta Giannakou, who had led planned reforms that sparked months-long demonstrations, lost her seat in parliament.

Socialist party leader George Papandreou faced internal dissent after his party's disappointing showing. Senior party member Evangelos Venizelos today did not rule out challenging Papandreou for the top post.

PASOK won 38 per cent of the vote and 102 seats in parliament, compared with 117 seats in 2004.

REUTERS SKB VC1807