* Former Prime Minister Yanukovich leads in first round
* Results show gap of 10-11 percent, but PM has good chance
* OSCE praises conduct of election
(Updates vote results, adds Yanukovich comments)
By Yuri Kulikov and Natalya Zinets
KIEV, Jan 18 (Reuters) - Ukrainian opposition leader Viktor Yanukovich and Prime Minister Yulia Tymoshenko will face each other in a run-off presidential election on Feb. 7 and official results from Sunday’s first round suggest a close contest ahead.
The election will define how Ukraine, a former Soviet republic of 46 million people wedged between the European Union and Russia, handles relations with its powerful neighbours, and may help unblock frozen IMF aid for its ailing economy.
With 97.44 percent of ballots counted from Sunday’s poll, Yanukovich held a strong lead with 35.33 percent, well below the more than 50 percent needed for outright victory, the Central Election Commission said. Tymoshenko had 25.02 percent.
The results set up what could be a close Feb. 7 contest. Analysts say Tymoshenko should pick up more votes from defeated first-round candidates, while Yanukovich will have to fight hard to extend his appeal beyond his support base in the Russian-speaking east of the country.
Tymoshenko, 49, helped lead the Orange Revolution against Yanukovich’s rigged 2004 presidential election victory and is most popular in the European-leaning west of the country.
She hailed the voting pattern as proof that Yanukovich, a 59-year-old former mechanic, had no chance in the second round and immediately began wooing eliminated candidates.
“Tymoshenko did probably better than expected, and is probably the most likely to eventually win when you look at where the votes from the other candidates are likely to go to,” said Joanna Gorska, deputy head of Eurasia Forecasting, Exclusive Analysis Ltd.
Yanukovich put a brave face on his failure to win outright in the first round.
“More than 70 percent voted against the current authorities and for the changes I offered in my programme,” Yanukovich said.
The votes of supporters of former central bank chief Sergey Tigipko, who was in third place with around 13 percent of the vote, could be important, Gorska said.
He, like fourth-placed former foreign minister Arseniy Yatseniuk, has been cool to overtures from the Tymoshenko camp. But he is an independent candidate with no party structure, so his supporters are free to vote for whom they wish.
Yanukovich made clear he would seek support from voters of other candidates. “I am ready to partially include the programmes of other candidates in my own programme,” he said.
Traders of the hryvnia currency took the election in their stride and said the market would be calm because the results of the poll had been expected. A holiday in the United States would also dampen the volume of trades, dealers said.
The hryvnia was unchanged from Friday’s level of 8.075-8.175/$. The central bank offered to sell dollars on Monday — as it had done last week — at 8.01/$.
Tymoshenko rushed to Luhansk in the east of the country after oxygen tanks exploded in a hospital and killed seven people.
International election monitors the Organisation for Security and Cooperation in Europe said the ballot had been “of high quality” and showed significant progress on previous polls.
But it said the law on electoral procedure had to be clarified. A last-minute court ruling on home voting and “unsubstantiated” accusations of large-scale fraud had shaken public confidence, it said.
Tymoshenko, a sharp-tongued populist, had been particularly strident in allegations before the vote that the Yanukovich camp planned massive electoral fraud.
Voters punished incumbent President Viktor Yushchenko, one of the architects of the Orange Revolution, for political in-fighting. Election results gave him around 5-6 percent.
Both leading candidates have pledged to seek better relations with neighbouring energy supplier Russia, in part to avoid the rows of recent years which led to supply cut-offs affecting parts of Europe.
Yanukovich has called for a strong, independent Ukraine following a neutral path and not joining NATO or any other bloc. He accused Yushchenko of excessively confrontational policies towards Russia, and said Ukraine’s real enemy was poverty.
He was tarnished by a scandal in 2004, when he initially claimed victory in an election tainted by allegations of fraud and was subsequently swept aside by the Orange Revolution that brought Yushchenko to power.
Although Tymoshenko initially had stormy relations with Russia, she has tried to patch up her links with the Kremlin.
Analysts said a Tymoshenko victory in February may be a more favourable outcome for the economy in that it would likely lead to a quicker resumption of the IMF bail-out programme.
The Fund broke off its $16.4 billion programme to Ukraine because Kiev breached pledges to control the budget deficit.
Analysts said if Yanukovich triumphed in February there would almost certainly be a new parliamentary election which would only delay action to get the country back on its feet.
“If Tymoshenko wins, you are probably likely to see stability return faster because she already has a more dominant position in parliament,” Gorska said. (Additional reporting by Pavel Polityuk and Dmitry Solovyov in Kiev and Peter Apps in London; writing by Richard Balmforth; editing by Andrew Roche)