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ANKARA (Reuters) - Turkey's highest court on Wednesday rejected an attempt to shut down the governing AK Party but imposed financial penalties on it for anti-secular activities, the court's chief judge said.
The verdict ended months of political uncertainty which has hit Turkey's financial markets over fears the democratically elected party would be closed, halting economic and political reforms needed for Turkey to join the European Union.
The AK Party, which has roots in political Islam, has long been at odds with the powerful secularist establishment over the role of religion in the officially secular but predominantly Muslim country.
The court case reflected a polarized country divided between pious Muslims who run the government, their supporters, and secular Turks, backed by the military and judiciary.
The Constitutional Court gave a sharp warning to the AK Party after finding it guilty of anti-secular activities, though not serious enough to merit it being shut down.
"We think that this political party should take the necessary message from this verdict," court chairman and chief judge Hasim Kilic told a news conference.
Kilic said six of the 11 judges voted to close it, four voted to impose fines and only one voted against. At least seven judges had to vote in favor of closure to carry the case.
Prime Minister Tayyip Erdogan, a former Islamist who has boosted Turkey's image abroad and brought about economic and political reforms at home, welcomed the outcome of the case.
Averting closure will not end the standoff, but it has strengthened his hand against his opponents.
"The AK Party, which has never been a focus for anti-secular activities, will continue to stand up for the fundamental values of the Republic," Erdogan told supporters.
Many critics said the court case was a "judicial coup" attempt against an elected party.
A closure could have hurt Turkey's European Union membership chances. In Brussels officials expressed relief at the verdict.
"I encourage Turkey now to resume with full energy its reforms to modernize the country," European Commissioner for Enlargement Olli Rehn said in a statement.
Rehn urged political parties to work together towards reforms based on a broad-based dialogue and called for an alignment of Turkey's rules on parties with European standards.
Financial markets had traded higher on expectations the party would not be banned. The lira was up 2 percent earlier in the day and stocks gained 6 percent. Turkey's benchmark global bond due in 2030 rose sharply after the ruling.
"This was an extremely positive outcome. The markets will overshoot on this news," said Luis Costa, an emerging market debt strategist at Commerzbank.
The focus will now be on whether Erdogan, known for his combative style, will take a conciliatory tone towards secular Turks who fear the prime minister and his party are seeking to steer Turkey towards a more religious-oriented society.
"The ball is now in Erdogan's court. If he takes the court decision seriously and makes a genuine gesture to get rid of current tensions and people's fears, society will calm down," said liberal Milliyet newspaper columnist Hasan Cemal.
Attention will also be on whether the AK Party, criticized for abandoning an aggressive reform drive following its re-election, will now push for economic and political reforms amid slowing economic growth.
"This will give relief to the economy. From now on we must focus on the economy. Turkey needs investments and to create new employment," said Tuncay Ozilhan, chairman of the major beer-to-banking conglomerate Anadolu Group.
British Foreign Secretary David Miliband said the court's decision was a "cause for celebration for Turkey's friends".
"This case has been a distraction from the political, economic and constitutional reforms that Turkey needs to modernize for EU membership. The priority now should be to focus on these reforms," Miliband said in a statement.
The prosecutor had charged the AK Party with engaging in Islamist activities and wanted the party to be banned and leading figures, including Erdogan and President Abdullah Gul, barred from politics for five years.
Moves to lift a ban on students wearing the Muslim headscarf at universities, municipalities seeking to ban alcohol in certain places and packing state bureaucracy with pious Muslims were proof of the party's Islamist agenda, the prosecutor said.
The AK Party was re-elected with 47 percent of the vote last year and had denied charges of violating the secular constitution by supporting Islamist activities.
Its annual state aid, which amounted to 47 million lira last year, was expected to be halved following the ruling.
More than 20 political parties have been banned for Islamist or Kurdish separatist activities over the years but none has been as popular as this governing party.
Additional reporting by Daren Butler/Thomas Grove in Istanbul, Paul Taylor in Brussels and Sebastian Tong in London; writing by Paul de Bendern; editing by Philippa Fletcher