UPDATE 2-Greek Socialists work on cabinet with big majority

* PASOK's Papandreou gets mandate to form government

* Key finance, economy nominations expected Tuesday

(Adds Papandreou expected to be sworn in as PM tomorrow)

By Ingrid Melander

ATHENS, Oct 5 (Reuters) - Socialist PASOK leader George Papandreou started putting together a cabinet on Monday after winning a decisive mandate to battle corruption and lead Greece out of an worsening economic downturn.

Appointments to key economy, finance and foreign ministry posts were expected as early as Tuesday, and Greek media were reporting Papandreou might take one of the jobs for himself to emphasise how seriously he took the crisis.

With 99 percent of Sunday's vote counted, results showed PASOK had thrashed the conservative New Democracy party, which suffered the worst showing in its history. PASOK won a comfortable majority of 160 seats in the 300-member parliament.

It was a personal victory for U.S.-born Papandreou, 57, who was handpicked in 2004 to lead the party his father Andreas founded, partly on the strength of his name, only to twice lose to another scion of a political family, Costas Karamanlis.

"What is impressive in this parliamentary election is that George Papandreou crushed his opponent with the largest percentage difference in the last 35 years," said Anthony Livanios, political analyst at polling agency Alpha Metrics.

Karamanlis gave up his role as party chief when he conceded the election on Sunday night.

Even more difficult challenges now lie ahead. Greece's budget deficit tops 6 percent of GDP -- well above the EU limit of 3 percent -- unemployment is rising and the public is clamouring for solutions to urgent crises in endemic corruption, education, social security and immigration.

"We must consolidate all our strength, we have a heavy responsibility," Papandreou said on Monday before receiving a formal mandate from the president to form a government.

Papandreou was set to be sworn in as prime minister on Tuesday and afterward obtain a presidential decree to allow him to rearrange ministries, including splitting economy and finance, a PASOK official said.

A first test will come with the budget, a first draft of which needs to go to parliament by November so that it can be approved before the year-end break in mid-December. [nL5488585]

"The budget will be a good test to see where the government is going, whether they are serious about improving the competitiveness of the economy," said Diego Iscaro, an analyst at IHS Global Insight.

THREE-YEAR PLAN

The budget will feed into a three-year plan that Papandreou wants to submit to Brussels to convince EU partners he is determined to tidy up Greece's fiscal mess.

In a nod to that effort, European Commission President Jose Manuel Barroso wrote to Papandreou on Monday.

"Europe today faces challenging times: we need to deploy our strengths and work together if Europe is to emerge stronger from the current financial and economic crisis and build a prosperous, secure and sustainable future for all Europeans," he said in a congratulatory message.

PASOK has promised a 3 billion euro ($4.36 billion) stimulus package on a platform of taxing the rich and helping the poor and will need to convince markets, the EU and voters that it can do so without further worsening Greece's ballooning deficits.

First market reactions were positive, especially on the strength of the Socialists' majority.

The yield spread of Greek government bonds over benchmark Bunds tightened about 4 basis points in early trade. Greek stocks opened 1.06 percent higher before closing down 0.5 percent.

"The market had discounted a socialist win but not to this extent," said analyst Manos Hatzidakis at Pegasus Securities. "It is the majority of 160 seats that sparked the positive sentiment in the market." As Greeks gathered in front of kiosks to read the headlines on Monday, they expressed mixed feelings about Sunday's vote.

"I hope that he'll take us out of the crisis and give us more job opportunities, everything a young person wants," said 23-year old student Maria Papadopoulou, who voted for PASOK.

But 25-year old Manos, a bank employee said: "I don't believe anything will change. We are between these two parties for decades and I think this was a vote of disappointment towards New Democracy."

(Additional reporting by Renee Maltezou, George Georgiopoulos, Angeliki Koutantou, Harry Papachristou and Tatiana Fragou; Editing by Sonya Hepinstall)

($1=.6879 Euro)

(For a graphic on Sunday's result, click here. For an interactive factbox, click here)