REYKJAVIK (Reuters) - Social Democrat Prime Minister Johanna Sigurdardottir swept to victory in Iceland's election on Sunday after street protests over an economic meltdown toppled the previous conservative-led government.
Though on course for an outright majority in parliament, her new centre-left coalition government will heve to overcome disagreements about entering the EU and on cutting spending and raising revenues to get state finances back in order.
With 81 percent of votes counted, results broadcast on RUV state television showed the Social Democrat/Left-Green caretaker government, which came in after the old administration fell, would win 34 seats, a majority of 3 in the 63-seat parliament.
The Social Democrats were set to get 20 seats from Saturday's election and the Left Greens 14.
"I believe this will be our big victory," Sigurdardottir, 66-year-old leader of the Social Democratic Alliance, told cheering supporters.
"I am touched, proud and humble at this moment when we are experiencing this great, historic victory of the social democratic movement," she said, adding that voters had also backed her idea of starting talks to enter the European Union.
Sigurdardottir said the vote would mark the first time since the Icelandic Republic was founded in 1944 that left-of-centre parties had won a majority.
The election showed the depth of anger at the long-ruling Independence Party, which oversaw Iceland's boom years but was blamed for the economic crisis that erupted last year when banks collapsed under a weight of vast debts.
TOUGH EU ISSUE
The television projection of the results gave the Independence Party 16 seats, down from 25 at the last election in 2007.
Icelanders took to the streets in January after their banks buckled under debt that was used to fuel aggressive overseas expansion into financial services.
The economy went into meltdown and Iceland's currency plummeted, forcing the government to agree a $10 billion IMF-led rescue for the nation of 300,000.
Iceland still expects the economy to contract by more than 10 percent this year and inflation was 15.2 percent in March.
Though the pro-EU Social Democrats will lead the coalition, they have to find a compromise with the anti-EU Left-Greens on entry talks with the bloc.
Sigurdardottir, who is convinced she can find such a compromise, has said Iceland should quickly start talks and then hold a referendum. She also wants to adopt the euro and says this could be possible within 4 years.
Left-Green leader Steingrimur Sigfusson, finance minister in the caretaker government, said informal talks with the Social Democratic Alliance on a new government would be held on Sunday and that he expected more serious negotiations later.
Asked whether the EU issue could be solved, he told Reuters: "I am optimistic."
Opinion polls show Icelanders remain split on EU entry, but Sigurdardottir has said that once they have understood the benefits they would back such a move.
A new party, formed from the grassroots movement that led the protests, was set to win 4 seats, the TV projection showed.
(Additional reporting by Omar Valdirmarsson)
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