Turkey's Erdogan faces rocky road after big win

By Paul de Bendern

ANKARA (Reuters) - Turkish Prime Minister Tayyip Erdogan on Monday celebrated a decisive poll victory but now faces challenges over delayed presidential elections, Kurdish separatist violence and Ankara's troubled EU bid.

His AK Party boosted its share of the vote in Sunday's parliamentary elections to 47 percent despite opposition efforts to portray his pro-business party, which has Islamist roots, as a Trojan horse set to turn Turkey into an Iran-style theocracy.

It was a personal triumph for Erdogan, who called the poll early after the army-backed secular elite blocked his choice of an ex-Islamist ally as the next president -- the first divisive issue parliament must tackle after it convenes next week.

"We will resolve this matter (presidential election) without causing tensions," Erdogan told a news conference.

Financial markets rallied on a result that keeps in power the party most favorable to foreign investment, without any need for coalition wrangling, but does not make it so strong as to provoke the army, guarantor of Turkey's secular system.

The lira currency hit its highest levels against the dollar in more than two years, bonds soared and Istanbul's stock exchange jumped five percent to a record close.

Although unofficial results gave the AK Party 47 percent of the vote, up more than 12 points on 2002, a stronger nationalist opposition means it will get 340 out of 550 seats, slightly fewer than now.

Parliament in one of the world's few Muslim democracies will now feel very different, with ultra-nationalists and two dozen pro-Kurdish independents in for the first time in years.

Foreign Secretary David Miliband of Britain, an ally of Turkey in the EU, said: "It's very important that across Europe we reach out to the new government in Turkey when it is formed. A stable and secure Turkey is massively in our interests."

A U.S. State Department spokesman congratulated the Turkish people on holding what he said was a free and fair election.

"I would point out that we have had a very good working relationship with Prime Minister Erdogan and his government, and that we have faith in Turkey's secular democracy," he said.

Erdogan, controversial but popular, vowed in his victory speech to pursue political and economic reforms to join the European Union and made conciliatory noises towards his foes.

COMPROMISE PRESIDENT?

Turks are now watching to see if that turns into compromise over a choice of president to replace staunchly secular Ahmet Necdet Sezer, a fierce critic of the AK Party whose term is up.

A crisis was sparked when the army, which ousted an Islamist predecessor of Erdogan's party 10 years ago, rejected the candidacy of Foreign Minister Abdullah Gul as president, fearing he would erode the republic's separation of religion and state.