* Stocks jump 17 pct, biggest rise in 17 years
* Circuit breakers halt trade twice; markets closed early
* Rupee up 9 percent from low in early March
* Morgan Stanley raises stock, growth projections
* Bond yields drop, stake sales seen to fund deficit
(Updates with intraday and closing rupee and bond levels in paras 20,21,and 23 and share prices range in para 17)
By Saikat Chatterjee and Pratish Narayanan
MUMBAI, May 18 India's main stock index leapt more than 17 percent on Monday for its biggest single-day gain in almost two decades, after the ruling coalition sealed a decisive election victory that calmed fears of political uncertainty.
The rupee INR=IN soared more than 3 percent to five-month highs against the dollar, its best one-day rise in more than a decade, and bond yields fell as the win boosted hopes a strong coalition which would be able to push through economic reforms that would boost foreign investment.
Prime Minister Manmohan Singh's Congress-led coalition eyed possible new allies and needed just 10 seats for a parliamentary majority, rare in a country used to unwieldy coalitions. [ID:nDEL176255]
A strong coalition, free of the pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia's third-largest economy, analysts said.
Investors cheered the victory by sending the market up nearly 15 percent within seconds of opening, triggering circuit breakers that halted trade for two hours.
A final circuit breaker was set off almost immediately after trading resumed, halting trade for the rest of the day. But overall volume was light at just 13.3 million shares, against a daily average of 400 million in 2009.
"Clients want to buy. They have nothing else to say," said R. Sriram, a technical analyst at ICICI Securities.
"There are still a lot of short positions pending. Investors will bang their boots and come in to cover them. There could be another circuit breaker," he said.
The 30-share BSE index .BSESN jumped 17.34 percent, or 2,110.79 points, to 14,284.21 points, for its highest close since Sept. 11. Trade was finally halted for the day before noon. [.BO]
The day's percentage rise was the biggest since a 20.8 percent jump on March 2, 1992 when Singh, who was then finance minister, unveiled reforms that opened the economy to foreigners.
Morgan Stanley (MS.N) raised its end 2009 target for the BSE index to 15,300 points, a rise of 7 percent from current levels, saying Indian companies would benefit from the election victory.
"We, now believe, that there is greater probability of our bull case rather than our bear case," analysts Ridham Desai and Sheela Rathi wrote in a note. [ID:nBOM455335].
Still, after the hefty rally, there were words of caution.
"In the short-term, sellers will come in, as ultimately economics will have to come in play," said Jayesh Shroff, fund manager at SBI Capital Markets, when the euphoria fades.
"This event probably does open up meaningful possibilities, but there's a lot to do, and there could be a lot in the way," Aditya Narain, an analyst at Citigroup Global Markets, said.
Macquarie Research said its top picks were leading mobile operator Bharti Airtel (BRTI.BO), state-run energy equipment maker Bharat Heavy Electricals (BHEL.BO), mortgage firm Housing Development Finance Corp (HDFC.BO), diversified Grasim Industries (GRAS.BO) and conglomerate Larsen and Toubro (LART.BO).
Shares in these companies rose between 14 percent and 33 percent on Monday.
The 50-share NSE index .NSEI leapt 17.74 percent to 4,323.15.
For a graphic on market moves, please see:
The rupee has benefited from a revival in foreign investment into the stock market.
The partially convertible rupee ended at 47.88/90 per dollar, 3.2 percent above Friday's close of 49.41/42, its biggest one-day gain since January 1998.
It rose as high as 47.77, at which point it was up 9.3 percent from a low of 52.20 in March and up nearly 2 percent this year.
"The downward bias in the dollar-rupee would continue and we could touch 47 in the near term," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
The benchmark 10-year bond yield IN060519AG=CC fell 22 basis points to a two-week low of 6.20 percent in early trade. It pared the fall to close at 6.31 percent, but was still well below Friday's close of 6.42 percent.
The election victory has raised expectations the government could sell stakes in state-run firms to help fund a widening fiscal deficit and ease the pressure on market borrowing.
At its low, the 10-year yield was down 117 basis points from a high of 7.37 percent in March when federal borrowing worries peaked. It is up 95 basis points from the end of 2008.
Pressure on India's sovereign rating could ease but there were no immediate plans to change the rating, Moody's said. [ID:nHKG177127] ($1=48.3 rupees) (Additional Reporting by Umesh Desai in HONG KONG and Swati Bhat in MUMBAI; Editing by Ranjit Gangadharan)