BRUSSELS, May 26 (Reuters) - Stunning victories in European Parliament elections by nationalist, Eurosceptic parties from France and Britain left the European Union licking its wounds on Monday and facing a giant policy dilemma.
Across the continent, anti-establishment parties of the far right and hard left more than doubled their representation, harnessing a mood of anger with Brussels over austerity, mass unemployment and immigration.
While the centre-right and centre-left will continue to control more than half of the 751 seats in the EU legislature, they will face an unprecedented challenge from noisy insurgents determined to stop business as usual in the 28-nation bloc.
French Prime Minister Manuel Valls called the breakthrough by Marine Le Pen's anti-immigration, anti-euro National Front, which topped a national vote for the first time and pushed his Socialists into third place, a political "earthquake".
He sought to counter her immediately by offering more tax cuts to spur an economy which is flatlining.
Across the Channel, another tremor raised new doubts about Britain's long-term future in the EU. Nigel Farage's UK Independence Party, which advocates immediate withdrawal, defeated the opposition Labour party and Prime Minister David Cameron's Conservatives.
The anti-EU vote was amplified in many countries by a low turnout of just 43.1 percent, but the pro-European centre ground held firm in Germany, the EU's biggest member state with the largest number of seats, as well as Italy and Spain.
France is one of the EU's founder members and the weakness of President Francois Hollande leaves German Chancellor Angela Merkel without a strong partner for the next leg of integration which economists say is vital to underpin the euro currency but which leaves voters cold.
"It will be more about pursuing policies that resonate with the people," Merkel said after her conservative bloc emerged as the strongest party grouping in Germany.
"They are less interested in the issue of whether there should be treaty change or not, but rather whether Europe is making a difference in their own lives," she added, noting high jobless rates in some countries had damaged trust in the EU.
A German-led drive to cut EU states' debts in response to the economic crisis which engulfed the bloc in 2010 is blamed by many for deepening recessions and delaying recovery.
Merkel called the far right and populist advances "remarkable and regrettable" and said France needed to focus on competitiveness, jobs and economic growth to overcome voters' disenchantment - a message echoed by French analysts.
"The legitimacy of Europe is weakened, the legitimacy of France in Europe is weakened further," said Dominique Moisi of the French Institute of International Relations.
"To function, Europe needs a strong balance between France and Germany. But France is moving the way of Italy or Greece in economic terms and moving the way of Britain in its relationship with Europe."
NO EARLY REFERENDUM
In Britain, Cameron rebuffed UKIP leader Nigel Farage's call for an early referendum on an EU exit, sticking to his plan to renegotiate membership terms if he is re-elected next year, and put the result to an in/out plebiscite in 2017.
However, some analysts said UKIP's surge may force the prime minister to toughen his stance on Europe and could scare more pro-European voters in Scotland into opting to leave Britain in a September referendum.
Centre-left Italian Prime Minister Matteo Renzi bucked the trend of anti-EU, anti-incumbent votes, scoring a stunning 41 percent to beat populist Beppe Grillo's anti-establishment 5-Star Movement by a wide margin, with disgraced ex-premier Silvio Berlusconi's centre-right Forza Italia trailing a weak third.
Renzi vowed to use his mandate to press for an easing of the EU's budgetary straitjacket to allow more public investment in growth and jobs, posing a policy challenge for Merkel, the guardian of fiscal orthodoxy.
"I consider this a vote of extraordinary hope for a country that has all the conditions to be able to change, and that can invite Europe to change," Renzi told reporters.
The Democratic Party leader said he would serve out his term until 2018 to press ahead with economic reforms rather than using his popularity to call an early general election.
A French official said Hollande would back Renzi's call for more pro-growth policies and tell EU leaders who meet on Tuesday evening that Europe had reached "the alarm level".
With France in a malaise, Renzi's hold on the rotating six-month EU presidency in the second half of the year gives him an opportunity to become a major player in the bloc if he can find common cause with Merkel.
The centre-right European People's Party, led by former Luxembourg Prime Minister Jean-Claude Juncker, was set to win 213 seats, provisional results issued by the parliament showed.
Juncker claimed a mandate to lead the executive European Commission, batting away questions about Cameron's reported opposition to his bid and saying Merkel's backing was "crystal clear".
"I don't care," the 59-year-old veteran federalist told a news conference, mopping his brow under the television lights. "I'm not on my knees. I won the election."
Merkel was more guarded at her Berlin news conference, saying she would go into the negotiation with Juncker as her candidate but neither big group could dictate the outcome, which could take weeks.
The centre-left Socialists, led by outgoing European Parliament President Martin Schulz of Germany, were in second place with 190 seats followed by the centrist liberals on 64 and the Greens on 53. Eurosceptic groups were expected to win about 142 seats, according to a Reuters estimate.
PRESSURE TO TACK RIGHT
The political fallout may be felt more strongly in national politics than at EU level, pulling mainstream conservative parties further to the right and raising pressure to crack down on immigration.
The anti-immigration far right People's Party topped the poll in Denmark and the extreme-right Jobbik, widely accused of racism and anti-Semitism, finished second in Hungary.
In the Netherlands, the anti-Islam, Eurosceptic Dutch Freedom Party of Geert Wilders - which plans an alliance with Le Pen - underperformed but still finished joint second in terms of seats behind a pro-European centrist opposition party.
Average turnout was only fractionally higher than the 2009 nadir of 43 percent despite efforts to personalise the election with the main political families putting forward a leading candidate, or "Spitzenkandidat".
In Greece, epicentre of the euro zone's debt crisis, the radical left anti-austerity Syriza movement of Alexis Tsipras won the vote but failed to deliver a knockout blow to the government of Prime Minister Antonis Samaras.
The two parties in the coalition, New Democracy and PASOK, won a combined vote larger than that of Syriza, and political analyst Theodore Couloumbis said the government's survival was not at stake despite its narrow two-seat majority.
(Additional reporting by Jan Strupczewski, Luke Baker, Martin Santa and Julia Fioretti in Brussels, Mark John and Pauline Mevel in Paris, Noah Barkin in Berlin, Andrew Osborn in London, James MacKenzie in Rome, Karolina Tagaris in Athens. Editing by Mike Peacock)