Croatia's ruling HDZ opens coalition talks after poll

ZAGREB, Nov 26 (Reuters) Croatia's ruling conservative HDZ party opened coalition talks today to secure another four-year term and take the former Yugoslav republic into the European Union after a close-fought parliamentary election.

Preliminary election results, with almost all the votes counted, gave Prime Minister Ivo Sanader's Croatian Democratic Union (HDZ) 61 seats.

The main opposition Social Democrats (SDP) had 56 seats, but refused to concede defeat as a period of intense coalition bargaining looms.

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, a former diplomat, still needs to woo a smaller centrist grouping and some of the country's ethnic minorities to win the 153-seat parliament, but he remained confident.

''Voters have given their trust to the HDZ. We have started coalition talks and we shall form the new government,'' he said.

SDP leader Zoran Milanovic also vowed his party would head the next government. A source close to the SDP told Reuters on Monday the party had already secured the backing of 68 deputies, nine short of a majority.

''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''.

The conservative Peasant Party (HSS) -- part of a centrist coalition who control eight votes and oppose any quick EU entry at the expense of Croatia's national interests -- are the likely kingmakers.

''HSS is one of the parties that have been most critical of some EU issues. So it would be interesting to see if they will push for some things that we might not think are EU-oriented,'' a Zagreb-based European diplomat said.

MORE REFORMS, EU MEMBERSHIP Regardless of the outcome, the country's political and economic agenda will in practice be dictated by Brussels.

Enlargement Commissioner Olli Rehn in Brussels urged Croatia to form the new government quickly and start working on ''fulfilling the necessary criteria''.

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.

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 on Monday.

''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.

Reuters AK VP0205