Australia's Gillard scrapes back to power

Australia's Prime Minister Julia Gillard speaks at a news conference in Melbourne August 22, 2010.

CANBERRA (Reuters) - Australian Prime Minister Julia Gillard secured a wafer thin parliamentary majority on Tuesday, ending a political impasse but hardly cheering investors worried about the fragility of her government and its plans to tax mining profits.

Gillard's Labor Party, which was punished by voters in August 21's inconclusive elections despite a robust economy, secured enough support from three independents and one Green lawmaker to form a one-seat majority in the lower house of parliament.

Her narrow victory means Labor can implement its proposed 30 percent mining tax, a prospect that dented resources stocks and the dollar, as well as pursue a $38 billion telecoms project, which supported shares in phone company Telstra.

Shares in mining heavyweights BHP Billiton and Rio Tinto extended losses on Tuesday after the independents backed Labor, dashing hopes that the conservatives -- who were opposed to the tax -- would take power.

Gillard's plans to put a price on carbon emissions is also now firmly back on the agenda, given her support from the Greens, who will hold the balance of power in the upper house from mid-2011.

"Labor is prepared to govern, Labor is prepared to deliver stable, effective and secure government for the next three years," Gillard told reporters at parliament after two weeks of secret negotiations on ending the country's political limbo.

"The Australian people have sent us a message in this election campaign. I've heard that message ... and what they are asking us to do is not to become waylaid in partisan bickering, but to build for the future," she said.

To secure support from the last two unaligned independents, Gillard promised to spend billions of dollars on rural areas, partly with funds from the proposed mining tax.

But her razor-thin majority left some doubts over how long she could cling to power.

A single lawmaker in the 150-seat lower house changing sides could bring legislative defeat for her government or, worse, the loss of a no-confidence motion. The government could also fall if it loses one by-election over the next three years.

"Unless there is a complete breakdown in the relationship between the Labor Government and the independent MPs we think the arrangement will prove to be more stable than many expect," said Deutsche Bank's macro strategist David Plank.

"Having said this, Labor only has a slender majority that could be lost after one by-election."

Gillard and conservative leader Tony Abbott had been desperately wooing the undecided independents since the elections and had agreed to reforms demanded by independent MPs, including brakes on executive power over parliament.

MAJOR POLICIES UP FOR REVIEW

Gillard's new allies have promised to support a stable Labor government and back its budgets, but they have all refused to give blanket guarantees to support Labor policies.

"This parliament is going to be different and no one party has dominance over the executive or the parliament," independent lawmaker Rob Oakeshott told reporters after announcing his decision alongside non-partisan colleague Tony Windsor.

"That is just the reality of the way we are going to do business over the next three years."

Despite its return to power, some of Labor's major policies could be up for review, including the mining tax and its $38 billion national broadband project.

BHP Billiton, Rio Tinto and Xstrata had already agreed with the government on the 30 percent tax due by 2012.

But the Greens are expected to put pressure on Gillard to toughen the tax, which could sink that deal and reignite a battle in which miners had warned that around A$20 billion in resource investment could be at risk.

(Additional reporting by James Grubel and Michael Perry; Editing by Mark Bendeich and John Chalmers)