UPDATE 3-Latvian PM to form majority coalition after vote
* Vote puts PM in majority position after minority govt
* Result will keep Latvia on IMF-led austerity, euro path
* Neighbours and investors likely to be relieved
(Adds Swedish reaction and analyst's comment)
By Patrick Lannin and Aija Braslina
RIGA, Oct 3 (Reuters) - Latvia's prime minister began talks on Sunday on forming a new majority government after a strong election win kept the country on its IMF-led austerity path to eventual euro zone entry.
Besides reassuring investors, the result was likely to be a relief for regional neighbours fearful of political instability in the country of 2.2 million people. Sweden immediately congratulated Prime Minister Valdis Dombrovskis.
Despite 18 months of tough spending cuts and tax increase to meet the terms of a 7.5 billion euro ($10.34 billion) bailout, Dombrovskis, 39, led his Unity bloc to victory in Saturday's vote with 33 seats in parliament, official figures showed.
His two partners won a combined 30 seats for a coalition total of 63 in the 100-seat parliament. The government was previously in a minority when it carried out the terms of the bailout led by the International Monetary Fund and the European Union.
Dombrovskis said his partners had agreed to continue working in a coalition and further talks would be held. He spoke after meeting the Union of Greens and Farmers, which won 22 seats, and the nationalist Everything For Latvia/For Fatherland and Freedom bloc, which won eight.
He said the aim should be to seek parliament's seal of approval in a vote on Nov. 2.
"We also agreed that Latvia's economic stabilisation programme and agreement with lenders must be further implemented," he added after meeting the Greens and Farmers.
Swedish Finance Minister Anders Borg, whose country contributed to Latvia's bailout in 2008 with other Nordic states, congratulated Dombrovskis.
"Latvia has taken important steps to ensure long-term, sustainable finances and the weekend's election shows clear support for to continue that line," he said in a statement.
Swedish Foreign Minister Carl Bildt said on his blog that Dombrovskis had done "surprising well".
Danske Bank analyst Lars Christensen said the clear result would ease investors' worries. "I would expect this to be received rather positively," he said, adding that it could provide further support for the Swedish crown.
It could help Latvia in its efforts to raise funds from international markets, rather than relying on the IMF and EU.
"It is clear to me that Latvian voters have voted for austerity and reform rather than populism," he said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic, click on link.reuters.com/per26p For a menu of election stories, click on [ID:nLDE68R0XQ] For a factbox on Dombrovskis, click on [ID:LDE6910DT] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
FURTHER CUTS NEEDED
More austerity lies in store to reduce the budget deficit on the path to euro entry, which under the IMF and EU deal is due in 2014. [ID:nLDE6910FK]
Dombrovskis said he would meet the opposition Russian minority party Harmony Centre, which had been hoping to win the election but finished in second place with 29 seats, to see if there was a way the government could cooperate with it.
Despite the cuts, Latvians have regarded Dombrovskis as an honest crisis manager of the mess left by other governments. The economy has begun to show a slow recovery from the 18 percent economic drop of 2009, the worst in the European Union.
People have accepted the budget measures, which have included public sector pay cuts of 50 percent, with forbearance.
The only public display of anger was a riot in Riga in January 2009, before Dombrovskis took office.
Harmony Centre, whose traditional base of support is Latvia's large Russian minority, had been hoping to woo ethnic Latvians to vote for it after the crisis and promote it to first place in the election and a possible place in government for the first time since the fall of the Soviet Union in 1991. [ID:nLDE68T0F6] (Editing by Andrew Dobbie)
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