* Historic result for prime minister with over 41 percent of vote
* PM Renzi says he has mandate to "change Europe"
* Grillo challenge fades after bitter campaign
* Berlusconi struggles, in third place after legal problems
By James Mackenzie and Steve Scherer
ROME, May 26 (Reuters) - Strengthened by a landslide victory in Sunday's European election, Italian Prime Minister Matteo Renzi has a clear mandate to push economic and institutional reforms in Rome and promote his pro-growth agenda in Brussels.
More than 40.8 percent of Italy's 27.3 million voters cast ballots for the centre-left Democratic Party, almost double the 21.2 percent who chose the anti-establishment 5-Star Movement, the second-biggest party, according to official figures.
Former premier Silvio Berlusconi's Forza Italia party scored a low 16.8 percent of the vote.
It was the best ever electoral victory by an Italian centre-left party. Europe's youngest leader, 39, was also one of the few across the continent not to lose against Eurosceptic parties that swept to victory in elections for the European Parliament.
"A historic result," Renzi commented on Twitter after facing what was his first nationwide election. "I'm moved and determined now to work for an Italy that can change Europe."
The scale of the victory in a country struggling to emerge from a three-year economic downturn gives Renzi legitimacy to tackle an ambitious programme of reforms laid out earlier this year after he staged a dramatic political coup that gave him control of an unwieldy coalition government.
Some observers say Sunday's success would allow Renzi to call snap national elections and consolidate his power in parliament, but that didn't seem on the cards as of Monday.
"You could be tempted to go to a vote seeing this result, but I think it's more important to work in the interests of citizens," Maria Elena Boschi, minister for constitutional reform, said.
Renzi is also likely to emerge stronger in Europe. Italy's Democratic Party could become the second-largest party in the Strasbourg-based legislature, second to German Chancellor Merkel's centre-right Cristian Democratic Union.
Shares in Italian banks rallied and the FTSE MIB outperformed other European equities markets in early trade on Monday after Renzi's triumph over the Eurosceptic 5-Star. Italian bond yields fell 9 basis points.
Italy's premier has pledged to respect commitments to its European Union partners to keep the country's public finances in check. But Renzi also wants Europe to focus more on policies that encourage growth and jobs, rather than austerity measures that have marked the continent's southern European economies for the past three years.
Given the slap in the face delivered to mainstream parties across Europe, he may find his peers more receptive.
Italy's rotating, six-month presidency of the EU, which begins in July, gives Renzi a good platform to promote his agenda. But he faces an uphill challenge convincing Merkel, the only other major European leader to emerge stronger from the elections, to agree.
The fast-talking and telegenic Renzi, the former mayor of Florence, took power three months ago by forcing out his low-key predecessor Enrico Letta in a party coup.
In the run-up to the European election, Renzi cut income taxes for 10 million low earners and eased hiring rules for temporary workers in a bid to boost the economy, the euro zone's third-biggest, and lower high unemployment.
He has promised further tax cuts for businesses and households while cutting the country's 2-trillion-euro debt, and sweeping reforms of Italy's institutions, including a new electoral law and the abolition of the Senate to streamline Italy's often slow lawmaking process.
"If the political forces in parliament know how to interpret this election, it will bolster support for Renzi's reforms," Davide Faraone, a PD lawmaker close to the premier, said.
Renzi heads a right-left coalition stitched together after the deadlocked 2013 national election. The New Centre Right (NCD), Renzi's coalition partner, won 4.4 percent of the vote, enough to stand on its own in the European Parliament after breaking away from Forza Italia last year.
The 77-year-old Berlusconi is serving a tax fraud sentence doing public service at an old people's home. Politicians from his party said on Monday that his inability to campaign was the reason for his party's disappointing showing.
With unemployment at just under 13 percent and the economy struggling to emerge from more than two years of recession, the election had been expected to see a strong rise in support for the 5-Star Movement of stand-up comic Beppe Grillo.
For Grillo, who fought tirelessly during a bitter campaign and who declared that he would win or give up politics, the result was a stinging defeat as he lost more than four percentage points compared with last year's national ballot.
As the projections came in, there was a conspicuous silence from his camp with his popular blog flooded with messages from opponents mocking his confident predictions of victory.
Grillo has yet to comment on the result. Still, his rowdy and unconventional movement is likely to remain a force in Italian politics. (Editing by Mike Peacock)