* Conservative Anastasiades short of outright majority
* Run-off against Communist-backed Malas on Feb. 24
* Kingmaker Lillikas suspicious of terms for any bailout
* Financial crash could reignite euro zone crisis
By Michele Kambas and Deepa Babington
NICOSIA, Feb 18 (Reuters) - Cypriot political leaders begin a week of bargaining on Monday after the first round of a presidential election failed to produce an outright winner to steer the island nation through its worst financial crisis in four decades.
Conservative leader Nicos Anastasiades, who backs a swift deal with EU and IMF lenders on a bailout to avert a Cypriot bankruptcy, won Sunday’s vote but fell short of the absolute majority needed to avoid a run-off on Feb 24. He faces Communist-backed Stavros Malas in that round.
Any financial crash in Cyprus could reignite the euro zone debt crisis just as confidence slowly returns to the bloc.
Complicating matters for investors, both leading candidates must court voters who backed runner-up George Lillikas, an independent deeply suspicious of terms for any bailout - which he says may keep Cyprus in perpetual bondage to foreign lenders.
“Our country is at a crucial juncture,” Lillikas told his supporters, refusing to disclose which candidate he will back.
“We will support policies which defend the sovereignty of the Republic of Cyprus, and every policy which defends our national interests and is resistant to the will of foreigners.”
The anti-austerity campaigner turned in a surprisingly strong performance in Sunday’s election, taking 25 percent of the vote and trailing Malas, who campaigned on a pro-bailout but anti-austerity platform, by just 2 points.
A lawyer who has led the Democratic Rally party since 1997, Anastasiades secured 45.4 percent and remains the favourite to clinch a victory next Sunday.
“I will reach out to political leaders, seeking to broaden the public mandate we have even more,” Anastasiades told cheering supporters after the first round.
“(It is a mandate) to get rid of a leadership which led us to food rationing, unemployment and misery.”
If successful, Anastasiades faces a long list of challenges in convincing European Union and International Monetary Fund lenders to sign off on a rescue before the tiny state faces a 1.4 billion euro debt repayment in June.
He will have to assuage fears Cyprus will never be able to pay back its debt even if given a bailout loan equivalent to the size of its economy, and quell concerns in northern Europe that the island is a hub for laundering money from Russia.
Talks on a rescue, which have dragged on for eight months, have also proven tricky because almost any way of solving the crisis - from restructuring debt to slapping losses on banks - could set a precedent for other troubled states and damage sentiment just as fears of a Greek euro zone exit fade.
European Central Bank board member Joerg Asmussen said on Sunday he hoped a financial rescue agreement that would include privatisations could be reached with a new Cyprus government by the end of March.
Cyprus sought financial help last year after its banks suffered huge losses from Greece’s sovereign debt restructuring. The island, which has been shut out of international financial markets since May 2011, needs about 17 billion euros in aid - roughly the same as its gross domestic product.
Reuniting Cyprus after its division nearly 40 years ago into a breakaway Turkish Cypriot state in the north and the internationally recognised south run by Greek Cypriots has lagged far behind economic troubles as an election issue.
“This result means that Cypriots have not quite decided if Anastasiades is the man to get them out of the crisis. It will be a tough second round,” said Fiona Mullen, an economist at the Sapienta consulting firm.
“It makes it a bit tougher for Anastasiades to persuade EU leaders that Cyprus is on the right path, that they will do what it takes to get a bailout.”
With unemployment hitting a record 15 percent and Cypriots still coming to grips with pay cuts, tax hikes and benefit cuts imposed last year in preparation for a bailout, many feel things can only get better from here.
“The situation undoubtedly can’t get worse and I expect concrete action (from Anastasiades) to revitalise the economy, to bring recovery and give hope to the people,” said 53-year-old doctor Pavlos Drakos.